marcel fontaine, filip de ly drafting international contracts an analysis of contract clauses 2006-1

DRAFTINGINTERNATIONAL

CONTRACTSAn Analysis of Contract Clauses

Marcel FontaineFilip De Ly

W Transnational Publishers, Inc.// Ardsley, New York

Published and distributed by Transnational Publishers, Inc.Ardsley ParkScience and Technology Center410 Saw Mill River RoadArdsley, NY 10502

Phone: 914-693-5100Fax: 914-693-4430E-mail: [email protected]: www.transnationalpubs.com

Library of Congress Cataloging-in-Publication Data

Fontaine, Marcel, docteur en droit.[Droit des contrats internationaux. English]Drafting international contracts: analysis of contract clauses /

Marcel Fontaine, Filip De Ly.p. em.

Includes bibliographical references and index.ISBN 1-57105-355-7

1. Contracts (International law) 2. Clauses (Law) 3. Conflict oflaws-Contracts. 1. DeLy, Filip. II. Title.K1024.F66132006346.02-dc22

2005056851

Copyright © 2006 by Transnational Publishers, Inc.

All rights reserved. This book may not be reproduced, in whole or inpart, in any form (beyond that copying permitted by u.S. Copyright Lawin Section 107, "fair use" in teaching and research, Section 108, certainlibrary copying, and except in published media by reviewers in limitedexcerpts), without written permission from the publisher.

Manufactured in the United States of America

CONTENTS

List ofAbbreviations xvIn,trvductiorl XVlZ

Chapter 1: Letters of Intent 1I. Introduction 1

II. Letters of Intent: Study of Cases 5A. First Group: Definitive Contracts,

With Particular Variations 6B. Second Group: Stages in the Negotiation 13C. Third Group: Letters Without Binding Effect

and Clauses Excluding Liability 20D. Fourth Group: Firm Agreement About Certain

Particular Aspects of the Negotiations 24III. Legal Considerations 30

A. Traditional Legal Categories 311. Offer and Acceptance 312. Promise to Contract. 323. Definitive Contracts 324. Condition Precedent 335. Entry Into Force Clauses 346. Problems of Authority 34

B. Specific Letters of Intent 341. Legal Nature 342. Contracts to Negotiate: Principal Legal

Problems 44IV. Advice to Negotiators 54V. Conclusion 56

Chapter 2: Recitals in International Contracts 59I. Introduction 59

II. Recitals in Practice 60A. Frequency of Occurrence 60B. Form 62C. Lengtll 63D. Contents 63

1. Attributes of the Parties 632. The Parties' Objectives in Entering

Into the Contract 65

iii

iv • Drafting International Contracts

3. The Spirit in Which the Parties HaveEntered Into the Contract. 67

4. Circumstances Preceding and Surroundingthe Contract 69

5. Links With Other Contracts 716. Stages of the Negotiations Up to the

Contract 737. Acknowledgements and Statements

by the Parties 748. Statement of Parties' Undertakings 769. Definition of Terms 78

III. Rationale for Recitals 79IV. Legal Implications 80

A. Recitals and Similar Phenomena 801. International Treaties 802. European Union Acts 813. Constitutions 834. Statutes and Regulations 845. Judgments and Awards 85

B. Legal Effects of Recitals to Contracts 871. Interpretation of the Contract 882. Vices de Consentement, Misrepresentations 913. Bases on Which the Contract Was

Entered Into 924. Estoppel 935. Effect on the Parties' Obligations and on the

Extent of Their Liability for Breach 936. Status of Pre-Contractual Documents 947. Links With Other Contracts or With

Third Parties 958. Substantive Provisions 969. Simulated Transactions-Obligations in

Favor of Third Parties 9810. Contractual Provisions on the Effects of

Recitals 99V. Advice to Negotiators 100

Chapter 3: Interpretation Clauses 103I. Working Method 103

II. Different Contract Interpretation Models 105A. Substantive Law 106B. Evidence 114

III. Analysis of Interpretation Clauses in InternationalContracts 119

Contents • v

A. Characterization Clauses 121B. The Process of Contract Determination 125

1. Contract Definition Clauses 1262. Ranking Clauses 1263. Contract Definition and Ranking Clauses 129

C. Entire Agreement Clauses 1291. Exclusion of Simulation

(Side-Letters or Contre Lettres) 1312. Exclusion of Previous Contracts 1323. Exclusion of Pre-Contractual Documents 1344. Exclusion of Written or Oral

Representations 1455. Exclusion of General Conditions:

Blocking Clauses 1486. Exclusion of Future Contracts and

Documents 149D. Heading Clauses 151E. Definition Clauses 153F. Language Clauses 156G. NOM-Clauses (No Oral Modification Clauses) 159H. Non-Waiver Clauses 163I. Severability Clauses 167J. Gap Filling Clauses 176K. Custom, Usage and Course of Dealing 178L. Good Faith and Fair Dealing Clauses 179

IV. Conclusions 181

Chapter 4: Best Efforts, Reasonable Care, Due Diligence andGeneral Trade Standards in International Contracts 187

I. Introduction 187II. Contractual Practice 188

A. Illustrations 1881. Types of Contract. 188

a. Distribution Agreements and SalesPromotion 188

b. Construction Agreements 190c. Manufacturing of Materials and Parts for

Motor Vehicles 193d. Research Agreements 193e. Technical Assistance Agreements 194f. Trademark and Patent License

Agreements 196g. Satellite Launch Agreements 197h. Letter of Comfort 198

vi • Drafting International Contracts

i. Documentary Credit. 199j. Counter-Trade Agreements 200k. Acquisitions of Companies 201

2. Types of Clauses 201a. Duty of Confidentiality 201b. "Porte-Fort" and "Good Offices" 202c. Force Majeure and Hardship Clauses 203d. Obligation to Mitigate Losses 204

B. Observations Concerning Practice 205III. Analysis, Attempt at Synthesis 207

A. Critical Analysis 2071. "Best Endeavours" and "Best Efforts"-

English and American Interpretations 2072. "Reasonable" in Common Law and

Civil Law 2143. "Due Diligence," "All Diligence,"

Obligations to Appropriate Means 2184. References to Business Norms 222

B. Attempt at Synthesis 2251. Basic Criteria 2252. Shades of Meaning 226

IV. Advice to Negotiators 229

Chapter 5: Confidentiality Clauses in International Contracts 231I. Introduction 231

II. Practice 233A. General Remarks 233

1. Form of Confidentiality Undertakings 2332. Types of Contract 2343. Stages in the Life of the Contract. 2374. Unilateral, Reciprocal or Parallel

Obligations 238B. Systematic Analysis of Confidentiality Clauses 239

1. The Subject Matter of the Confidentiality 2392. Exceptions Made as to Types of

Information 2473. Exceptions Made as to Persons

(Sharing the Secret) 2554. The Intensity of the Obligation-

Steps to Be Taken 2705. Duration 2786. Remedies 2827. Limitation to the Scope of the

Confidentiality Undertaking 285

Contents • vii

III. Further Reflections and Critical Analysis 286A. Confidentiality Without Any Confidentiality

Clallse 286B. Transfer to Third Parties: Legal Aspects 287C. Legality of Confidentiality Clauses 291D. Confidentiality Clauses and Disclosure

Under Legal Procedure 293E. Effectiveness of Confidentiality Clauses 295

IV. Advice to Negotiators 297

Chapter 6: Penalty Clauses 299I. Introduction 299

II. Practice 301A. Analysis 301

1. Late Performance 3022. Breach of Performance or Warranty of

Quality 3193. Failure to Supply 3234. Failure to Perform an Obligation to

Purchase 3245. Failure of Licensor to Discharge

His Obligations With Regard to theDefense of Patents 326

6. Failure to Comply With an Obligation toRefrain From Acting 326

B. General Considerations Concerning Practice 3281. Types of Contracts 3292. Types of Obligations 3293. Absence of Penalty Clause 3314. Drafting Technique 332

III. Legal Analysis 334A. Penalty Clauses and Similar Clauses 335

1. Penalty Clauses and Clauses"for Winding Up the Contract" 335

2. Penalty Clauses and Withdrawal Payments( Clauses de Dedit) 336

3. Penalty Clauses and Price AdjustmentClauses 337

4. Penalty Clauses and Judicial Penalties(Astreintes) 338

5. Penalty Clauses and Clauses LimitingLiability 338

6. Penalty Clauses and Penalties Not Consistingof an Obligation to Pay a Sum of Money 340

viii • Drafting International Contracts

B. Whether the Clause May Be Declared Null andVoid or Revised 342

C. Combination of Remedies 346IV. Conclusion 349

Chapter 7: Limitation of Liability and Exemption Clauses 351I. Introduction 351

A. Notion 3521. Liability and Warranty 3522. Clauses Relating to Pre-Contractual

Statements 3533. Exemption Clauses or Limitation Clauses 354

B. Comparisons With Certain Similar Clauses 3551. Liquidated Damages Clauses 3552. For-ce Majeur/? Clauses 3553. Hold-Harmless Agreements 356

II. Practice 357A. Exemption Clauses 358B. Limitation Clauses 360

1. Limitation of the Conditions 360a. Limitation of the Scope of the

Obligations 361b. Liability Limited to Cases of Fraud or

Gross Negligence 362c. Extension of the Cases of Exemption 364d. Transfer of the Burden of Proof 366e. Limitations of Time Periods to

Take Action 367f. Subjection of the Claim to Special

Requirements 3682. Limitation of the Consequences 369

a. Limitation of the Amount Payable 369b. Liability Deductible 372c. Exemption ofJoint Liability 373d. Exclusion of Consequential Damages 373e. Exclusion of Unforeseeable Damages 377f. Limitation of the Warranty to Refund,

Replace or Repair the Object Concerned-Clause of "Exclusive Remedy" 378

g. Limitation of the Warranty as to theWarranty Enjoyed by the Seller Transferof Warranty 380

III. Additional Remarks and Critical Observations 381A. Problems of Validity 382

Table of Contents • ix

1. Domestic Legal Systems-Impact ofEuropean Directives 382

2. International Instruments 3883. Private International Law 389

B. Consequential and/or Unforeseeable Damages 391C. Limitation Clauses and Insurance 394

1. Influence on Contractual Practice 394a. The Obligee Is Insured 394b. The Obligor Is Insured 396c. The Exemption Clause Renders

Insurance Unnecessary 3972. Insurance and the Validity of Exemption

Clauses 398IV. Conclusions 399

Chapter 8: Force Majeure Clauses in International Contracts 401I. Introduction 401

II. Practice 402A. Hypothesis 402

1. Definitions 403a. Classical Definitions 403b. Attenuation of Criteria 403c. Reference to External Criteria 406d. Lack of Definition 408

2. Enumerations 408a. Lists 408b. Combination With the Definition 413c. Exclusions 416

B. Regime 4181. Notice, Evidence 418

a. Notification 418b. Evidence 421c. Remedies 422

2. Exemption From Liability 4243. Suspension of Performance 424

a. Extending the Duration of the Contract. .. 425b. Suspension Without Extension 425c. Procurement Contracts 426d. Unilateral Clauses 426e. Costs Incurred by the Parties 427

4. Efforts to Overcome the Obstacle ofFOTce MajeuTe 428

5. The End of the FOTce MajeuTe: Notice 4296. Termination, Re-Negotiation 430

a. Possible Termination 430

x • Drafting International Contracts

b. Re-Negotiation 432c. Re-Negotiation or Termination 434d. Winding Up 435

7. Obligations to Pay a Sum of Money 4368. Insurance Covering Force Majeure Events 4379. Differentiated Regime for Each Party 438

III. Critical Considerations 439A. Force Majeure and the Applicable Law 439B. For-ce Majeur/? and Lex Mercatoria 441C. Force Majeure, Hardship and Exemption

From Liabililty 4421. Notion 4422. Hardship and Exemption From Liability 443

a. Hardship 443b. Exemption of Liability 445

D. Effects 4461. Exemption and Suspension 4462. Termination, Re-Negotiation, Adaptation,

Winding Up 4473. New Obligations 448

E. A Standard Force Majeur/? Clause? 4481. Arguments Against Drafting a Model

Force Majeure Clause 4482. The Expression For-ce Majeure 450

Chapter 9: Hardship Clauses 453I. Introduction 453

A. Sanctity of Contracts and Substantial Change ofCircumstances 453

B. Solution in Comparative Law 453C. Hardship Clauses 455D. Hardship and Force Majeure 456E. Hardship and "Sujetions Imprevues" 457F. Hardship Clauses, Index Clauses, Review

Clauses, Exchange Clauses, AdaptationClauses, Etc. 457

G. Hardship Clauses and Safeguard Clauses 458II. Practice 458

A. General Observations 458B. Critical Analysis of Hardship Clauses 460

1. Preamble 4602. Hypothesis 461

C. Consequences 4701. Prejudice 4702. Objective Criteria 471

Table of Contents • xi

3. Subjective Criteria 4724. Specific Consequences 472

D. Establishing the Existence of the RelevantSituation 473

E. Grace Period 475F Procedure.................................. 475

1. Notice 4762. Re-Adaptation of the Contract 4763. Objective, Subjective and Mixed Criteria 4774. Disagreement Over the Content of the

Revision 480a. Lack of Specific Provision 480b. Termination of the Contract 481c. Suspension of the Contract 482d. Intervention of Third Parties 483e. Fate of the Contract During

Re-Negotiation 486G. Unilateral Clauses 486H. Return to Normal Circumstances 487

III. Final Observations 487

Chapter 10: "English Clauses," Most-Favored CustomerClauses and First-Refusal Clauses in InternationalContracts 493

I. Introduction 493II. English Clauses 494

A. Definition, Economic Role 494B. Concept of a More Favorable Offer. 495C. Proof of Competitive Terms and Conditions 497D. Repercussions on the Contract 498E. Procedural Matters 500F Constraints on the Application of the Clause 501G. Variants of the Clause 502

III. Most-Favored Customer Clauses 503A. Definition, Economic Role, Comparison

With English Clauses 503B. Comparability of Terms and Conditions 504C. Proof That More Favorable Conditions

Have Been Granted 506D. Repercussions on the Contract 507E. Procedural Matters 508F Constraints and Limits on the Application of

the Clause 509G. Variants of the Clause 510

xii • Drafting International Contracts

IV. First-Refusal Clauses 512A. Definition, Comparison With Other Clauses 512B. Economic Role 514C. Provision in First-Refusal Clauses, Comparability

and Verification 518D. Procedure 522E. A Variation: The "Savoy Clause" 523

V. Specific Legal Problems 524A. Nature of the Role of the Independent Assessor 524B. Remedies for Infringement on the Clauses 527C. Validity of the Clauses With Regard to Price

Determination 530D. Validity of the Clauses With Regard to

Competition Law 532VI. Final Considerations 535

Chapter 11: Assignment Clauses 537I. Working Method 537

II. Introduction and Definitions 538III. Scope of the Chapter 539IV. Analysis of Assignment Clauses in International

Contracts 541A. General Observations 541B. Headings 545C. Distinction Between Transfer of Contract and

Assignment of Rights 545D. The Location of Assignment Clauses in the

Contract 546E. Relationship of the Assignment Clause to

Related Mechanisms 546F. Unilateral and Bilateral Assignment Clauses 547G. Compulsory and Voluntary Assignment 548H. Various Clauses Regulating Assignments 549

1. Right to Assign 5492. No-Assignment Clauses 5493. Restrictive Assignment Clauses 550

a. Procedure to Obtain Consent 551b. Formal Requirements 551c. Criteria for Refusing Consent 551d. No Reaction Upon the Request for

Consent 553e. Consent Refused 553f. Sanction Upon Non-Compliance 553

4. Exceptions to No-Assignment orRestrictive Assignment Clauses 554

Table of Contents • xiii

a. The Mfiliate Exception 554b. Other Exceptions 556

I. Partial Assignments 558J. Consequences of the Application of the

Assignment Clause 5591. Consequence Vis-a-Vis the Assignee 5592. Consequences Vis-a-Vis the Assignor. 5603. Consequences Vis-a-Vis the Debtor/Obligor 562

K. Warranties of the Assignor Vis-a-Vis the Debtor/Obligor and Indemnities 562

L. Costs Related to Assignment 563V. Conclusions 563

Chapter 12: Termination Clauses 565I. Work Method 565

II. Introduction and Definitions 567III. Scope of the Chapter 567IV. Analysis of Termination Clauses in International

Contracts 569A. General Observations 569B. Headings 572C. The Location of Termination Clauses in the

Contract 573D. Relationship of Termination Clauses to Other

Contracts 573E. Unilateral and Bilateral Termination Clauses 574F. Nullity and Voidability 574G. Condition Subsequent 576H. Termination by Mutual Consent

(Mutuus Dissensus) 577I. Performance 577J. Breach of Contract 578K. Passing of a Fixed Period 581L. Termination at Will 582M. Objective Termination Events 583N. Partial Termination 587o. Consequences of the Application of the

Termination Clause 588V. Conclusions 595

Chapter 13: Post-Contractual Obligations in InternationalContracts 597

I. Introduction 597II. Post-Contractual Obligations: General Overview 598

A. Winding Up of the Past 599

xiv • Drafting International Contracts

1. Fate of Remaining Stock 5992. Fate of a Data Bank 6003. Return of Documents 6014. Return of Advertising Materials 6015. Effects of Outstanding Orders 6026. Risk of "Posteriority" and Insurance 6037. Effects on Work in Progress 603

B. Extension Into the Future 6041. Agreement Not to Compete 6052. Duties of Confidentiality 6063. Guarantee Obligations 6084. Communication of Improvements and

Refinements 6105. Fidelity, Exclusivity, First Refusal. 610

III. Post-Contractual Obligations: Common Problems 611A. Express Clauses and Implicit Obligations 612B. Specific Clauses, Enumeration or

General Formula? 614C. Problems of Lawfulness 615D. Penalties 616E. Parallel Survival of the General Clauses

of the Contract? 616F. Duration and Change in Circumstances 618

IV. Conclusion 620

Final Observations 621List ofMembers 641Reference to Original Publications 645Index 647

LIST OF ABBREVIATIONS

A.2dA.C.All E.R.Am. J. Compo L.Ann.Fac.Dr.LiegeArch. Phil. Dr.BCLCCah. Dr. Eur.Colum. J. Transnat'l L.Colum. L. Rev.Dall.Dir. Comm. Intern.D.P.C.I.

F.2dFSRGaz. Pal.Int. Compo L.Q.

Journ. Business LawJourn. Dr. Int.Journ. Int. Arb.Journ. Off.Journ. Trib.Jur. Class. Per.Lloyd's Rep.Lloyd's Mar. Com. L.Q.

LQRNed. Jurist. BladNethel.Int. Law Rev.Northwestern Univ. Law Rev.Pas.P&CRQ.B.RabelsZ.

Atlantic Series, Second EditionLaw Reports, Appeal CasesAll England Law ReportsAInericanJournal of Comparative LawAnnales de la Faculte de Droit de LiegeArchives de Philosophie du DroitButterworths Company Law CasesCahiers de Droit EuropeenColumbiaJournal of Transnational LawColumbia Law ReviewRecueil DallozDiritto del Commercio InternazionaleDroit et pratique du commerceinternationalFederal Reporter (Second Series)Fleet Street ReportsGazette du PalaisThe International and ComparativeLaw QuarterlyJournal of Business Law [Journal de Droit InternationalJournal of International ArbitrationJournal OfficielJournal des Tribunaux (Belgique)Jurisclasseur PeriodiqueLloyd's Law ReportsLloyd's Maritime and Commercial LawQuarterlyLaw Quarterly ReviewNederlands JuristenbladNetherlands International Law ReviewNorthwestern University Law ReviewPasicrisie beigeProperty and Compensation ReportsQueen's BenchZeitschrift fur ausHindisches undinternationales Privatrecht

xv

xvi • Drafting International Contracts

R.D.A.L/LB.LJ.

Rec.Rechts.Weekbl.Rev. Arb.Rev. Crit. dr. int. prive

Rev. Crit. Jur. B.Rev.Comm.Belg.Rev. Dr. Immob.Rev. Dr. Int. Dr. Compo

Rev. Dr. McGillRev. Dr. Unif.Rev. Int. Dr. CompoRev. Reg. Dr.Rev. Trim. Dr. Civ.Rev. Trim. Dr. Com.

Rev. Trim. Dr. Eur.RJ.W.Southern Calif. Law Rev.TLRT.P.R.Tulane J.lnt'l Compo L.

Tulane Law Rev.U.S.Virginia Law Rev.Wayne L. Rev.WLR

Revue du droit des affairesinternationalesl International BusinessLawJournalRecueil des arrets de la Cour de JusticeRechtskundig WeekbladRevue de l'arbitrageRevue Critique de droit internationalpriveRevue Critique de jurisprudence beIgeRevue de droit commercial beIgeRevue du droit immobilierRevue de droit international et deroit compareRevue de droit McGillRevue de droit uniformeRevue internationale de droit compareRevue regionale de droitRevue trimestrielle de droit civilRevue trimestrielle de droit commercialet de droit economiqueRevue trimestrielle de droit europeenRecht der internationalen WirtschaftSouthern Californian Law ReviewTimes Law ReportsTijdschrift voor PrivaatrechtTulane Journal of International andComparative LawTulane Law ReviewUnited States Supreme Court ReporterVirginia Law ReviewWayne Law ReviewWeekly Law Report

INTRODUCTION

The law of international contracts is a particularly rich field forresearch. This becomes obvious when one examines very closely how thesecontracts are drafted in practice.

A Working Group on International Contracts (hereafter also referredto as Working Group or Group) has been meeting since 1975 to conduct asystematic analysis of the main types of clauses appearing in internationalcontracts. The Working Group uses large samples taken from the practicalexperience of its members. The Group is made up of corporate lawyers,members of the Bar and professors specializing in international trade transactions. Most participants come from France and Belgium, but othernations, for instance: Brazil, Egypt, England, Germany, Italy, the Netherlands, Poland, Spain, Switzerland and the United States,) are representedby assiduous members. The Group meets usually two or three times a year.For each new topic, abundant documentation is initially gathered to be discussed during several meetings. A draft report is then prepared and submitted to the Group before being finalized. All studies have beenpublished, either in Droit et Pratique du Commerce International, or in theInternational Trade LawJournal.'2 From 1975 to 1992, the Group was chairedby Marcel Fontaine, before Filip De Ly took the chair.

Over the years, these reports have gradually covered the most sensitiveclauses, offering a reasonably complete image of how an international contract is or should be drafted at the beginning of the 21st century. The present book would like to document this cooperative effort, by gathering andcoordinating updated versions of the different reports published between1975 and 2001.3

The first edition of this book was published in 1989.1 In preparationfor this book, earlier reports have again been submitted to a smaller com-

1 A complete list of all participants since the Group's origins is given as an appendix.

2 References to the original publications are given as an appendix.

3 Two reports elaborated by the Group do not appear in the present volume,because they do not deal with general types of contractual clauses, but rather with a specific contract as a whole (d. Aspectsjuridiques des contrats de compensation, D.P.C.I,1981, pp. 179-223) or with a clause specific to a type of contracts (d. Les clauses dedivorce dans les contrats de groupements d'entreprises internationaux, I.B.LJ, 1995,pp.279-315).

4 M. Fontaine, Droil des r:onlrals inlernalionaux-Analyse el redar:lion de clauses, Paris,F.E.C., 1989,365 pp.

xvii

xviii • Drafting International Contracts

mittee, then to the whole Group. A large number of new clauses have beengathered and discussed on each single topic in order to achieve an adequate update of the working in actual practice.

The Group has worked on clauses drafted in different languages. Manyof them are written in English, but some others in French, Spanish,German or Italian. They are quoted in their original versions, due to thedifficulty of preparing absolutely reliable translations. The commentariesshould enable the reader not familiar with some of these languages tograsp the meaning of the quotations.

The Group continues its work. As this book is being printed, the Groupis engaged in the study of choice of law and dispute resolution clauses.There will certainly be material for a further edition in a few years.

The life of a contract begins at conception. The negotiating stage is notvoid of legal effects. In practice, during the lengthy negotiations that canbe expected when dealing with important economic operations, the partiesexchange preparatory documents, such as letters of intent and similarinstruments. Their legal consequences are analyzed in the first chapter.When the contract is drafted, parties often feel the need to make differentstatements in "recitals": they introduce themselves by name and qualifications, state the purposes of the contract, list the main stages of the negotiation, etc. Such introductions are far from being without legal effects(Chapter 2). In addition, parties are often concerned with including someclauses that could help interpret the contract: definitions, entire agreementclauses, stipulations concerning the use of languages, modifications,waivers, partial avoidance, etc. (Chapter 3).

Once the contract is concluded, it has to be performed. One problemis to define the intensity of the obligations undertaken by the respectiveparties, especially when contractual clauses resort to "open" formulas: toexert one's best ifforts, to act with diligence, to take reasonable care, etc. Whatcould be the meaning of such common but imprecise expressions(Chapter 4)? A particularly sensitive obligation is that of keeping certaininformation confidential. The drafting of confidentiality clauses proves tobe delicate (Chapter 5).

Several characteristic clauses deal with the risk of non-performance. Anobligee will often attempt to determine in advance the amount of the damages due by the other party in case of breach, with an adequate liquidateddamages clause, but such a clause may also be inspired by the obligor himself wishing to limit his liability (Chapter 6). Exemption and limitation ofliability clauses come in a great variety (Chapter 7). Non-performance cannot always be imputable to the obligor, who may then find his exemption

Introduction • xix

in a force majeure clause; such clause, in international contracts, has very particular characteristics (Chapter 8). Sometimes, performance of a contractis not impossible, but it is seriously hindered by a change in circumstancesthat were originally present when the contract was executed. What is tohappen to the contract in such situations, including its renegotiation, is thesubject matter of hardship clauses (Chapter 9).

Other clauses provide for the adaptation of the contract when certainmarket conditions change and the competition is affected (''English'' clausesand mostfavored customer clauses), or grant a party the right of first refusal incase another operation takes place (Chapter 10). The rights and obligations deriving from the contract, and sometimes the contract itself, may beassigned. Certain clauses tend to provide for such operations, usually witha restrictive approach (Chapter 11).

The contract normally terminates when performance is complete, butother causes may lead to its premature ending. Such causes are often organized by clauses that can often be elaborate (Chapter 12). Finally, someclauses survive the contract, having effects that extend beyond the performance of the main obligations: warranties, confidentiality, non-competitionclauses, etc. (Chapter 13).

This systematic analysis of the main clauses present in internationalcontracts leads to a few concluding observations.

The publication of this book offers the opportunity to express gratitude. First of all, we thank the members of the Working Group onInternational Contracts, without whom this would not have been possible.The different studies were written by each of us respectively, but we simply present and expand, at our risk, the results of the fascinating discussions to which all members have contributed, on the basis of the invaluabledocumentation and the treasure of experience they have provided. We alsowant to thank them, perhaps above all, for the friendly atmosphere thatpermeates all our meetings, and which has contributed so much to the success of the project.

This English edition is the result of many efforts. Our special gratitudegoes to the International Business LawJournal (Paris), as well to Paul Ellington, our late friend, and to Juan Rodrigues, who provided English translations of earlier versions of different chapters. The whole manuscript wasedited with great care and competence by Barbara Jungers, whom wewarmly thank for her extremely appropriate corrections and suggestions.

Professor Henry Lesguillons, this tireless and imaginative promoter,originally asked that one of us create and chair this Group. He never

xx • Drafting International Contracts

ceased to provide us with help and encouragement. He deserves our deepgratitude.

Finally, this book owes much to the late Professor Charley del Marmo!.Back in the 1950s, he conceived the idea to organize these productivemeetings between corporate counsel and law professors, within the"Commission Droit et Vie des Affaires" of Liege University in Belgium; he wasthe proponent of a less litigious perception of the law, of a positiveapproach aimed at preventing disputes through fair and well drafted contracts. Such spirit inspires the work of the Group, as well as this book.

Marcel Fontaine and Filip De Ly

September 2005

CHAPTER 1

LETTERS OF INTENT

I. INTRODUCTION

Before its conclusion, a future contract may produce particular legaleffects. The negotiations that precede the parties' agreement may give riseto obligations and, by engaging in those negotiations, potential partnersmay lose part of their freedom of action and may have to comply with certain behavioral standards.

This is true, in particular, when the contract relates to a complex andwide-reaching operation, for which the negotiations or the performancemay take months or even years and will require the cooperation of severalenterprises. Consider, for example, complex mergers and acquisition contracts, agreements relating to the turn-key construction of a factory or tointegrated production of civil or military aircraft, the exploration or extraction of natural resources, long-term supply contracts for primary materials or the transfer, exchange or joint implementation of new technology.

The legal structure covering such operations is necessarily very intricate. Sometimes there are a number of inter-dependent contracts withnumerous and often complex clauses seeking to join provisions that areessentially "technical" with others more specifically "legal."

The negotiations of such contracts are long and difficult. Between theinitial definition of the common objectives and the signing of the finalagreements, there is a slow work process: preliminary studies, obtaining thenecessary assistance from third parties (e.g., financing and insurance),applying for governmental permits that will eventually be required and ultimately refining the details relative to the various aspects of the agreementbetween the parties (e.g., specifications, periods for completion and delivery, determination of prices, clauses providing for variations and supervening events, guarantees of performance, arbitration). Such negotiationsand the various stages involved, may take years. Not infrequently, the discussions continue after the start of performance of the contract, when theurgency of the project drives the parties to proceed with operations beforethe contractual documents are fully completed.

During the prolonged gestation of their agreements, the negotiatorsoften feel the need to create a series of preparatory documents. At thestart, such documents set out the purpose and scope of the discussions to

2 • Drafting International Contracts

come, and they spell out procedural aspects. As the discussions proceed,their results are recorded. Certain basic agreements may be accepted, whilespecific details remain to be determined.

Sometimes, such documents are intended to inform third partieswhose involvement is sought. At other times, it is such third parties who,upon the request of one of the principal parties, provide written assuranceof their eventual involvement, so that this may be known to the other principal party.

Any such preparatory documents are frequently titled letter of intentor memorandum of understanding, though many other expressions areused (protocol, letter of understanding, agreement in principle, heads ofagreement, etc.). The frequency of their use in practice has led to the common use of their abbreviations such as "L/I" (letter of intent), "MoU"(memorandum of understanding) or LoU (letter of understanding). Thischapter will investigate the legal effect of such documents and offer adviceto potential drafters.

For this purpose, the expression "letter of intent" will generally be usedhereinafter to designate any kind of pre-contractual document l by whichone or both parties intend to organize the negotiations and execution ofthe contract. 2 The notion of "letter of intent" has the advantage of reflect-

1 A document will be established in most cases for evidentiary purposes, but onecan also consider purely verbal expressions of intent.

2 The subject of letters of intent was very novel when the original report was published in 1977. Since then, a vast literature has developed. See, for instance, the proceedings of a colloquium held in Tours on negotiating international contracts, partlydevoted to letters of intent, D.P.C.I, 1979, pp. 49-69 as well as U. Draetta, Il diritto deicontratti internazionali. I"a Jorrnazione dei contratti, Padova, 1984, pp. 47-80; J. Cedras,L'obligation de negocier, Rev. Trirn. Dr. Corn., 1985, pp. 265-290; U. Draetta, Gli usi delcommercio internazionale nella fonnazione di contratti internazionali, in Gli usi del wrnrnerciointernazionale nella negoziazione ed esecuzione dei contratti internazionali, Milan, 1985,pp. 37-52; F. T'Kint, Negociation et conclusion du contrat, in I"es obligations contractuelles,Jeune Barreau (ed.), Brussels, 1984, No. 36--38bis (Les "accords de principe"); G. Schrans,De progressieve totstandkoming der contracten, T.P.R, 1984, pp. 1-32; Ph. Marchandise,La libre negociation-Droits et obligations des negociateurs,]()lun. Trib. (Brussels), 1987,pp. 624-625, updated in Le juriste dans la negociation, Brussels, Bruylant, 1998, pp.3-25; L. Rozes, Projets et accords de principe, Rev. Trirn. Dr. Corn., 1998, pp. 501-510;Siebourg, Der I"etter oj Intent, thesis, Bonn, 1979; Forrnation oj contracts and precontractualliabilily, Paris, ICC Publishing, 1990,354 pp.; Prewnlrar:lualliabilily, Reports to the XlIIthCongress International Academy of Comparative Law, E.H. Hondius (ed.), Deventer,Kluwer, 1990,376 pp.; U. Draetta & R. Lake, Letters oJintent and otherprecontractual docurnents, 2nd ed., Salem, N.H., Butterworths, 1994,330 pp.;J.M. Loncle &J.Y Trochon,Pratique des negociations dans les rapprochements d'entreprises, Paris, EFE, 1997,85-101; M. Funnston, T. Norisada & J. Poole, Conlnu;l.!ormalion and lellers of inlenl,Chichester, Wiley, 1998, 322 pp.; N. Herzog, Der Vorvertrag im schweizerischen und deutschenSchuldrecht, Zurich, Schulthess, 1999, 240 pp.; G. Capecchi, II valore giuridico delle let-

Letters of Intent • 3

ing a wide and encompassing variety of pre-contractual documents. Thediscussions held and analyses reached in the Working Group made clearthat, in practice, all the above expressions are used in an inter-changeablemanner and have no precise significance. However, some believe that"MoDs" and heads of agreement belong more specifically to the categoryof letters of intent stating the results of negotiations already achieved,which need not be discussed again.:)

The legal nature of letters of intent remains unclear. It appears thatoften the writers of such letters believe that they incur no obligations,although there sometimes harbor the thought that they might obtain acommitment from the other party. Notwithstanding the enormous varietyof situations and formulae one may encounter,1 one gains the impressionthat certain letters of intent or certain clauses contained in such letters, docreate, at that stage, certain legal obligations on the part of their signatories. The principal difficulty regarding the characterization of letters ofintent lays in the fact that, whatever the applicable law, the phenomenonof letters of intent has hardly received any notice from the classic rules oflaw on the formation of contracts. The established pattern of law, as well asinternational uniform law instruments, have been built from observationof very simple contracts for everyday life, contracts whose formation is, forthe most part, immediate. Certainly, legal science has developed certainrefinements, such as the rules applicable to contracts formed by correspondence, or to promises to contract, or the doctrine of"culpa in contrahendo," but it seemed remarkably ill-prepared in the face of the manyvicissitudes of even slightly complex negotiations.

More recently, letters of intent, agreements in principle and similardocuments have gradually found a place in legal analyses of pre-contractual negotiations, even appearing in some classical treatises. Case law also

tere di intenti, Dir. Cort!rt!. Ini., 2001, pp. 383-394; J.M. Mousseron, M. Guibal & D.Mainguy, L'avanl-conlral, Paris, F. Lefebvre, 2001, 379 pp.; Cood!ailh in Eum/Jean Conlnu:lLaw, R. Zimmermann & S. Whittaker, Cambridge University Press, 2000, pp. 236-257; L.Vandomme, La negociation des contrats internationaux, I.B.LJ, 2003, pp. 487-501; A.Berg, Promises to Negotiate in Good Faith, foaLl! Quarterly Review,July 2003, pp. 357-363;G. Capecchi, Nature and enforceability of a letter of intent under Italian Law, I.B.LJ,2004, pp. 151-160.

3 R. Schlosser, Les lettJ-es d'intention: portee et sanction des accords precontractuels, in Responsabilite civile et assurance, ro'tudes en l'honneur de Baptiste Rusconi,Lausanne, Editions bis et ter, 2000, pp. 347-348. An analogy can be drawn to "Termsheets" used in the financial sector to summarise the main terms of a transaction (e.g.,a loan agreement) in a few pages. In bank practice, "Term-sheets" are generally considered as indicative but non-binding.

4 This diversity is especially demonstrated in a Dutch book: W.M.S. Schut, LellersofIntent, Tjeenk Willink, 1986, 108 pp.


produced some remarkable decisions where judges took the opportunityto state some governing principles.S

However, the legal analysis of letters of intent still means, in largemeasure, the exploration of new territory. It involves an exercise in reflection and imagination based on general principles, 6 complicated by thefact that these principles vary from one legal system to the next.7 The elements of the answer that will be proposed in this book must be viewedcritically; they only constitute a first sketch of a legal edifice where muchremains to be done.

What method was followed by the Working Group on InternationalContracts in the study of letters of intent?

A substantial collection of sample documents was assembled: morethan 100 letters of intent or analogous documents were the subject of discussion and analysis.s To avoid prejudging the result of our discussions,all documents created at whatever stage in negotiations and appearing to

5 Case law remains scarce. A few decisions will be analyzed further in this chapter.Another illustration is the S.M.E. case in Italy. An agreement was concluded in 1985between the LRJ. and Buitoni concerning the transfer to the latter of 51 percent ofS.M.E. shares. This agreement was not implemented and a Rome tribunal regarded it asthe mere expression of an intent to negotiate, not to conclude a contract (cf. U. Draetta,Criteri redazionali di littere di intento alIa luce dei casi Pennzoil e SME, Dir. Comm.Intern., 1987, pp. 249-250. The text of the agreement is reproduced at pp. 270-272).

6 For a thorough analysis demonstrating that letters of intent avoid the "all ornothing" of the traditional law of contract formation and are instruments of risk management, see M. Lutter, Der Leller of Intent, 3rd ed., Cologne, C. Heymanns Verlag,1998,215 pp.

7 For comparative studies, see the notes published with the black letter provisionsand comments of the Principles ofHuropean Contract /"aw, O. Lando & H. Beale (eds.),The Hague, Kluwer Law International, 2000, pp. 191-193; Good Faith and Faull inContract Law,]. Beatson & D. Friedman (eds.), Oxford, Clarendon, 1995,531 pp.;].W.Carter & M. Funnston, Good faith and fairness in the negotiation of contracts, 8 Journ.of Contract /"aw, 1995, pp. 1 and 93-119. Also see a study of American, English, Frenchand German law which points out the differences and shades separating those four systems on two levels: determining the moment when a contract is deemed to be concludedand the conditions under which pre contractual liability may appear (R.B. Lake, Lettersof Intent: A Comparative Examination Under English, U.S., French and West GermanLaw, 18 Ceo. Wash.]. of Int. /"aw and Hcon., (1984), pp. 331-354). Further references areK. Zweigert & H. Katz, An IntmrI!u;tion to Comf)(Lrative Law, 3rd ed., 1998, pp. 356-364;Centre de droit des obligations de l'Universite catholique de Louvain, Le fJmcessus de.rm~

mation du contrat, M. Fontaine (ed.), Brussels, Bruylant and Paris, L.G.DJ., 2002, 920 pp.About letters of intent in respect to the lex mercatoria, see F. Osman, /"es principes generauxde la lex mercatoria, Paris, L.G.DJ., 1992, pp. 50-83, who also considers the competenceof international arbitrators in disputes concerning liability for breach of negotiations.

R Other illustrations of letters of intent are available in M. Lutter, op. cit., pp.161-198; R. Lake & U. Draetta, op. cit., pp. 263-304.


constitute some part of the progressive elaboration of the final contractwere brought together, whatever characterization the parties might havegiven them.

The Working Group then sorted these documents into two categories:firstly, those that could be classified into some known legal category (suchas offers to contract, final contracts-appearances to the contrary notwithstanding-and contracts subject to a condition precedent) and secondly,true letters of intent, the real subject of our study. Guided by the explanations of those members of the Group who had provided the documentsand had been personally involved in the negotiations in question, theGroup then looked into the circumstances in which such letters weredrafted, into their intended purposes, into the legal effect that one couldattribute to them and into the guidance they could give for the conduct ofnegotiations.

The discussion was complicated by the fact that different analyses werepossible depending on which law was applicable. The Group members conducted its discussions, for the most part, looking to French and Belgian law.We have, however, also attempted to establish the principal elements ofanalysis according to English law. The following pages will also make reference to other legal systems, in particular to American, Dutch, German,Italian and Swiss law, as well as to uniform law. The results of our discussions are presented in three sections.

To illustrate a variety of positive situations, the assembled documentation will first be presented in the form of various cases. The second sectionwill try to formulate a theoretical synthesis of the nature and legal effect ofletters of intent.

In conclusion, this report will offer practical recommendations tonegotiators.

II. LETTERS OF INTENT: STUDY OF CASES

Twenty-six letters of intent extracted from our files will be the object ofcase studies. They typifY the principal kinds of situations as identified by theGroup. Brief commentaries will follow each case.

It is not rare to encounter letters of intent of up to ten pages and theexcerpts given may not always fully reveal the context and the nature ofthose letters.9

9 The length of most of the letters of intent examined by the Group prevents usfrom presenting these examples in full. We will try, nevertheless, to provide as precise adescription as possible, often with quotations of the most typical passages.


A. First Group: Definitive Contracts, With Particular Variations

The first group of examples discussed gives an initial appearance ofvague and ambiguous language, tending against the existence of a perfectconsensus ad idem, which the commentator must therefore bring out. Wehave also included, in the first group, two provisions that frequently encumber agreements that are otherwise definitive, i.e., conditions precedent andentry into force clauses.

Example i-Acceptance of an Offer

Presentation: A letter entitled "lettre de commande" ("order form") issent by a Minister to a Public Works Construction Company. It says:

"Nous avons l'honneur de vous informer que vous etes declaresadjudicataires des marches ... relatifs a la construction, la fourniture, Ie montage, les essais et la mise en service de ... L'adjudicationest faite sur la base des prescriptions et des specifications contenuesdans les documents de l'appel d'offres, a savoir ... , et aux conditions de votre offre du ... , modifiee et mise ajour conformementau texte du procE~s-verbalde la reunion duo ..."

The letter then repeats the details of the agreed prices before settingout the financial terms. It ends as follows:

"Nous vous prions de nous faire parvenir dans un delai de quinzejours un accuse de reception, dflment signe et date, pour acceptation sans reserves, de la presente commande."

Commentary: This letter certainly appears to constitute the acceptanceof an offer, that is to say, the event that completes the formation of a definitive contract. Negotiations have taken place resulting in a final offer on thepart of the offeror, to which precise reference has been made. The "orderform" simply accepts this offer. There is, however, reason to doubt: the letter requires an acknowledgement of receipt "in order to provide anunqualified acceptance." Perhaps this is an attempt to transform into anoffer what is already an acceptance, in order to postpone the formation ofthe contract; such an attempt, inconsistent with the facts, is ineffective.More simply, the author of the letter presumably wishes to have completereassurance as to the terms of the transaction as they have been shapedduring the negotiations.

Example 2-Letter of Comforl

Presentation: Company F accepts a loan from a bank. The bank asks forand obtains from company M, which owns the majority of the shares in F,the issuance of a letter as follows:


"Nous declarons par la presente avoir parfaite connaissance desclauses et conditions d'ouverture de credit conclues entre F etvotre banque. Nous vous confirmons notre intention de conservernotre influence au sein de F et de veiller, par tous moyens appropries, a. ce que la situation financiere de cette societe lui permettede faire honneur a. ces engagements qu'elle assume vis-a.-vis devotre banque. II va de soi que nous vous informerions au cas OUnotre point de vue a. ce propos devrait se modifier."

Commentary: This is a document commonly called "letter of comfort" (inFrench the expression lettre de patronage is also used), by which a parent company shows, for the benefit of a party contracting with its subsidiary, itsintention to maintain its control and support.]() In the experience of severalmembers of the Group, the deliberately vague description of the undertakings merely shows concern that these undertakings not be mentioned in theaccounts of the parent company, but does not exclude that obligations areassumed. But, if so, what are the status and scope of any such obligations?The parent company does not, strictly speaking, guarantee a precise debt,but it does warrant, in a general way, the solvency of its subsidiary. Theundertaking is certainly contractual; even if the "letter of comfort" isexpressed in unilateral form, one may conclude that it has been the subjectof the acceptance, at least tacitly, of its addressee, especially as the latter has,in most cases, requested the letter. What can we make of the last phrase inthe letter? Some think that such a notification of change of attitude canonly, in good faith, be given after an appropriate period of notice.

The foregoing analysis as to the effect of a "letter of comfort"11 underlines an important principle of interpretation: the wording used by the parties is inconclusive, if it is inconsistent with the facts. 12

10 See, e.g.,]. Terray, La lettre de confort, Banque, 1980, pp. 329-338; Fac. de Droitde Namur & Feduci, Les lettres de patmnage, Namur and Paris, 1984, 434 pp.; U. Draetta,La lettere di patronage nella prassi del commercio internazionale, Diritto cornunitario edegli scarnbi internazionali, 1985, pp. 55-64; Chr. Bright & S. Bright, Beware the Letter ofComfort, New Law.!, 1988, pp. 365-367.

11 In France, the declamtion de patmnage has been the subject of an Opinion from thePresident of the Association of Banks, according to which, since it constitutes "a moralundertaking to ensure a satisfactory conclusion to the loan," it should be considered "asproviding in practical terms security comparable to a guarantee," at least when it is issuedby a company of repute. In the view of the Group, it goes further: one can discern in ita truly legal obligation. The text of this Opinion appears in the Bulletin de la CaisseNationale des Marches de l'Htat, 1975 No. 68 green pages 85-88 with a commentary that purports to deal with letters of intent in general, but, in fact, only deals with df:claraJioT/s de

patmnage. The Opinion is further considered by C. Gavalda &]. Stoufflet in their study inSernaineJuTidique, 1976, 1 No. 2301; in this study there are several interesting suggestionstowards further precision of the legal nature of the declamtion de patmnage according tothe circumstances (in particular where the concept of natural obligation is concerned).

12 Guarantees offered by a parent company to the party contracting with its sub-


Such documents must be distinguished from what will be characterizedas specific letters of intent (see Section n.B). Letters of comfort are a formof personal security used in practice, with variable legal effects, while specific letters of intent are documents relating to pre-contractual negotiationsbetween parties and to the progressive formation of the contract. So far asthey give assurance of financial support of a mother company or a creditinstitution, letters of comfort share with some letters of intent the vagueness in expressing their legal effect; they are also often issued in order tofacilitate negotiation between the supported company and a third party.However, a letter of comfort has its own finality; it is not part of the seriesof documents that will successively appear during the course of a negotiation. From the terminological point of view, it would be advisable to distinguish letters of comfort from "letters of intent," but the confusionremains widespread, at least in France. 13

Example 3-Contract to Be Drafted

Presentation: A letter confirms with precision its author's agreementwith the various elements of the offer and ends with the phrase:

"Nous demandons anotre ingenieur-conseil de prendre contactavec vous, dans les meilleurs delais, en vue de la mise au point desdocuments definitifs des marches."

As in Example 1, we find ourselves with the acceptance of an offer, thatis to say, with the firm conclusion of the contract. Does the last phraseintroduce doubts? Certainly not. Here it is only a question of drawing upthe contract document, an operation that, in many legal systems, is withouteffect on the formation of the contract. But this example allows us to drawattention to the fact that many negotiators, not being legally qualified,wrongly imagine that nothing is tnl1y concluded so long as a contract in fulland due form has not been drawn up and signed, and that everythingbefore this only expresses intent, even if the parties are fully determined to

sidiary can be expressed much more precisely, e.g., in the form of a working capitalagreement. This is a contract bearing the signatures of the parent company and theother contracting party by which the former~ generally speaking, certifies the exactnessof the financial situation of its subsidiary, undertakes to maintain its shareholding andguarantees the due performance of its obligations by the subsidiary. In such cases theagreement is quite unambiguous.

13 Cf., e.g., B. Oppetit, L'engagement d'honneur~Dall., 1979, Chr., pp. 109-110; M.De Vita, Lajurisprudence en matiere de lettres d'intention. Etude analytique, Gaz. Pal.,1987, pp. 667-670; Casso fr., 21 dec. 1987, Jur. Cl. PeT., 1988, No. 21113, conc!. M.Montanier, Dall., 1989, j, 112, note J.P. Brill; X. Barre, loa leUTe d'intention, Paris,Economica, 1995,410 pp.


proceed. Sometimes negotiators are aware that the agreement is complete,but wish to protect the susceptibilities of their legal advisers appointed todraw up the contract documents. This misconception, or this courtesy, is atthe origin of a certain number of documents being called letters of intent.Although they are not a final evidential document, these letters producefull agreement of the parties with the terms of their contract, and, in spiteof the semantics, they must be considered the final contract.

This situation is to be distinguished from cases where negotiators wereonly authorized to negotiate, not to conclude the contract. In these scenarios, no real meeting of the minds can occur prior to the participation of thelegally authorized persons. The conclusion of the contract may then coincidewith the signature of the evidentiary document (see Example 19 below).

Example 4-Contract to Be Drafted

Presentation: A department of a Ministry writes to a joint venture company:

"This letter is to notify you of the Ministry's intent to award yourfirm the project for...."

Then follow detailed references to the preceding documents, which led tothe agreement of the parties with the terms of their transaction. The letterfinishes with the formula:

"Considering this as a letter of intent to start your preparation forcommencing the works, we request you to delegate an authorizedrepresentative to sign the contract documents which are now beingprepared; and to submit the contract final guarantee in accordance with the provisions of the Contract Documents."

Commentary: As in Example 3, this is probably the acceptance givingbirth to a final contract, only the completion of the contract documentsremains. The addressee of the letter is already invited to provide the guarantee envisaged in the contract. Some doubt can, however, arise from thefact that there is only mention of the intention of the Ministry, and that thedocument is entitled Letter of Intent. The terms used are not conclusive,if the context reveals a different situation (cf. Example 2). The intentionof the Minister is equivalent to consent, and this self-styled letter of intentconstitutes the final acceptance of the contract. The solution would be different if the applicable law made signature of the contractual documentsan essential pre-condition to the binding of the public authorities, or if aproblem of authority, as mentioned in the preceding example, arose.


Example 5-Declaration ofFinal Agreement,Temporary Evidential Document, Arbitration Clause

Presentation: One company writes to another in order to:

"confirmer les agreables entretiens ... au cours desquels ont etenegociees diverses conventions,"

agreements then listed and the letter continues:

"II nous reste a materialiser par divers contrats les modalites definitives de nos accords qui forment un tout, et nous attendons vospropositions de textes telles qu' elles resulteront de l'avant-projetque nous vous avons remis et des divers documents deja echanges.Cependant, ainsi qu'il a ete convenu de commun accord, lapresente lettre constitue notre accord sur les conditions essentielles des contrats restant a specifier, et de part et d'autre, noussommes definitivement engages et passons des a present a l'execution, nous, en vous faisant effectuer les premiers paiements etvous, en commenc;ant vos etudes."

Then follows a reminder of the principal elements of the agreements asreached. Next,

"les divers documents echanges au cours de nos entretiens constituent l'esprit des contrats qui seront precises a bref delai. Au cas011 les difficultes surgiraient entre nous pour la mise au pointdefinitive des contrats, nous vous proposons, au cas 011 nous nepourrions nous mettre d'accord, de nous referer a l'arbitrage dela e.e.r. a Paris."

The author of the letter finally asks the addressee to return the signed copyof the contract to indicate his agreement.

Commentary: Here again, only the contract documents are left to bedrawn up, the contracts already having been concluded. The existenceof final obligations is explicitly confirmed and the performance of thecontracts is to commence without further delay. The letter in questionamounts to an invitation to lay down, in writing, the agreement on thebasic elements of these contracts in order to constitute provisional contract documents. One should note the interesting arbitration clauserelating to subsequent disagreement on the finalization of the contractdocuments.

Letters of Intent· 11

Example 6-Condition Pn!cedent

Presentation: Companies A and B establish a document recording thevarious elements of an agreement reached during their negotiations. Theyspecify that

"les engagements decoulant de la presente lettre d'intention sontsujets al'approbation des autorites competentes (of the two countries in question)."

Commentary: In principle, this is a contract with a condition precedent.In French law, such a contract is considered to exist in seed as long as thecondition is not satisfied. Once the condition is satisfied, the contractenters into effect retroactively to the date agreement was reached. If thecondition is not satisfied, nothing is considered ever to have had effect.The event constituting such a condition must be a future and uncertainevent; the condition precedent must not be purely potestative, i.e., dependon the sole wish of a party that undertakes it (Article 1174 C. iv.). The document, which sets out agreement between negotiating parties on certainpoints while reserving further issues to be agreed upon later during negotiations, cannot, for this reason, be regarded as a contract subject to a condition precedent.

Example 6 illustrates a very common situation. Numerous international contracts require the total or partial approval of public authoritiesof the countries in question. The need to obtain these authorizations introduces a condition precedent to the full effect of the agreement. These arecertainly future and uncertain events, not solely depending on the will ofthe party undertaking them.

We must, however, qualify this conclusion. Firstly, where the authorization is to be obtained from the authorities of the country of which oneparty in question is itself a public body, it is not always evident that the willof the party and of the governmental body are absolutely distinct. Further,generally speaking, the chances of obtaining the necessary authorizationsdepend, in part, on the way in which applications for permits are submitted, and the signatories of a contract containing such a condition precedent assume, in this respect, an obligation to use their best efforts to obtainthe required authorizations (compliance with notice periods, with formalities, etc.). Reference was made to the practice of unscrupulous contracting parties causing themselves a denial of their application in order tore-negotiate the contract or the breakdown of contractual relations. Inorder to curb such a practice, some contracts that are subject to priorauthorizations expressly oblige the parties to do all that is necessary to


obtain the required approvals. 14 A provision for liquidated damages mighteven be considered in certain cases. The refusal of authorization would, inany event, prevent the fulfillment of the transaction, but the contractingparty in breach may be held liable. Finally, the relevant regulations canmake the necessary authorization a feature essential to the formation of thecontract, so as to make it a "contrat solennel" (i.e., a contract for which someformality is a pre-requisite). In such a case, the contract is only formed atthe moment authorization in obtained, and until then it does not evenexist in seed. The obligation to work to obtain the necessary authorizationstill exists.

Governmental authorizations are clearly not the only possible examples of conditions precedent capable of inhibiting the full effect of international contracts. This can also be made to depend, for example, onobtaining adequate financing, or on the conclusion of a complementarycontract with a third party (cf. below Example 11).

Example 7-Entry Into Force Clause

Presentation:

"The contract will only come into force when the following conditions have been fulfilled: (a) Approval of the contract by thecompetent (governmental) authorities ... not later than 60 daysafter the date of signature of this contract; (b) Receipt by the supplier of the down payments mentioned throughout Article XIIInot later than 60 days after the date of signature of this contract;(c) Receipt by the investor of the performance bond as mentionedin Article III, within 60 days after the date of signature of this contract.... Each postponement of one of the dates mentioned inparagraphs (a) (b) and (c) will result in a postponement, with atleast the same period, of the dates of putting into successful trailoperation of the exchange ordered."

Commentary: How should one analyze this Entry into Force Clause?

Paragraph (a) takes the form of condition precedent as in Example 6.But a period is specified for the satisfaction of this condition. What thenif the condition is not satisfied within that? In other circumstances onecould liken this to a condition that has failed, thereby destroying the contract from the beginning. Certain international contracts do adopt such amechanism, but here the intended effect is less radical: the various periodsset for the performance of the contract will be put back by a period corre-

11 On Best HiJorts clauses, cf. infra, Chapter 4.


sponding to the one required for authorization. But beyond that, onceauthorization is obtained or refused, the normal rules regarding conditionsprecedent will apply.

As for events stated in sub-clauses (b) and (c), they are not conditionsprecedent. In fact, these events consist of the performance of certain contractual obligations; naturally, the very purpose of a contract cannot bemade into a condition. Rather these are clauses setting out the inter-dependence of reciprocal obligations, certain effects of the contract being suspended while the obligations stipulated in (b) and (c) are not yetperformed. Although the last sentence provides a similar result in the caseof mere delay in the satisfaction of the condition, as compared to failure ofpayment or non-receipt of the guarantee, the difference between the firstsub-clause and the latter two becomes obvious when the events in question,instead of being delayed, are not achieved at all: the failure of the condition puts an end to the contract without giving rise to claims between theparties (with the exception of Example 6 where one of the parties actuallyhas caused the failure of the condition), while the non-fulfillment of theobligations set out in (b) and (c) can give rise to contractual claims. IS

Entry into Force clauses can take many forms. Some adopt the methodof a condition subsequent: the contract comes into force on the day of itssignature on condition that certain events (e.g., authorization, provision ofa guarantee, etc.) be achieved within a stated period after signature. Anyanalysis must always carefully consider the legal technique adopted.

B. Second Group: Stages in the Negotiation

What is the legal effect of the most common types of letters of intent,which relate to the successive stages of long negotiations, beginning withthe initial declaration of purpose to the final detailed listing of resultsachieved in almost complete negotiations?

Example 8-Initial Intent

Pn!sentation: Firm A writes to Firm B:

"Apres examen des documents que vous nous avez communiqueset suite aux differents entretiens que vous avez eus avec notreingenieur des telecommunications ... , nous vous informons de

15 On the subject of conditions precedent regarding governmental approval andentry into force clauses, consider further examples in and the commentary of PhilippeKahn, in Le Contrat ewnmnique international (proceedings of the VIlthJournees d'etudesjuridiques Jean Dabin of the University of Louvain), Bruxelles & Paris, 1975, pp.189-193.


notre intention de vous passer eventuellement commande d'uncommutateur teIephonique de type ... Pour la bonne regIe, noustenons a stipuler que la presente ne constitue en aucune fa<;,:onune commande."

Commentary: At first sight, this is a straightfonvard declaration of intent,excluding all legal obligations. The second phrase indeed appears to confirm this expressly. Why then write such a letter? Facts reveal that it was sentat the request of the negotiator of Firm B, anxious to demonstrate to hissuperiors that he succeeded in raising interest on the part of his counterparts in Firm A.

Several members of the Group, looking to French law, raised concernsthat the issuance of such a letter could have legal effects if A does not ultimately place the order with B. Despite the ambiguity of the terms used,some discerned in the letter a certain affirmation of the negotiations' genuineness, which might lead to blaming A with tortious behavior in the eventof subsequent unjustified breach of negotiations. On the other hand, doesthis letter not at least constitute implicit approval of the technical qualitiesof the product? Members voiced the opinion that the drafting of such a letter should at least be more circumspect, merely confirming the interest inthe product, without mentioning the intention to place an order in duecourse (cf. below Example 15). In the opinion of the English members ofthe Group, if subject to their law, such a letter would have no legal effect.

Example 9-Protocol Relating to the Conditions forLicences and Contracts for Cooperation

Presentation: Materials X and Yare parts of an assembly Z. Company Ahas specialized in the manufacture of material X and Company B in that ofmaterial Y Negotiations took place to reach the conclusion of reciprocallicence agreements and cooperation agreements relating to the manufacture, assembly and supply of the assembly Z. Some time after the start ofthese discussions, the parties established their position in a "Protocol as tomaterials X and Y between the companies A and B."

In it are specified "the conditions for participation of B in access to theinformation concerning the concept and manufacture of material X(developed by A)." These conditions require B to sign four agreements:two licence agreements and two cooperation agreements. The protocolthen specifies the extent to which A and B shall participate with regard tomaterial Y Article 5 sets out the principles by which materials X and Y shallbe governed, i.e., (a) the quantities assigned to each of the firms shall ingenerally be the same for the two types of material; (b) the royalties under


the licence agreement shall be the same and their conditions similar; (c)each contract shall begin and end at the same time. 16

Commentary: This protocol was signed by parties fully committed toreaching a successful conclusion to their negotiations. The contracts envisaged were indeed subsequently concluded. The object was to establish anagreed-upon basis for the inter-dependence of future agreements and forthe precept that a fair balance between the parties' respective interestsshould be secured. The protocol also establishes the percentage of therespective shares concerning material Y

What is the legal effect of such a protocol? Clearly, it does not establishthe conclusion of the licence contracts or the cooperation contracts, ofwhich only the principle and the general spirit are stated. A substantial starthas been made into the negotiation of these contracts, which decidedly distinguishes Example 9 from the preceding one; yet nearly all the clausesremain to be stipulated.

According to the classical analysis of the formation of contracts, which,generally speaking, bestows no specific legal effects upon the differentphases of the negotiation prior to the tender, a breakdown of negotiationscan only give rise to a damage claim if there are special circumstancesamounting to wrongful behavior.!7 Such would be the case, for example, ifone could prove that the party, who broke off negotiations, never had agenuine intention to actually reach an agreement and then had, nevertheless, by such a deceptive maneuver, induced the other party to investsubstantial and expensive efforts into the negotiations. In this light, onemay consider that the fact of having signed the above protocol could contribute to the proof of a tort committed by the party breaking off negotiations without justification.

But in view of such a document, which sets out so clearly that the parties agree on certain important elements at this stage of their negotiations,may one not take this a step further and consider that there already existsa contractual undertaking? The subject matter of such an interim contractcould obviously not be identical to that of the final contracts for whichmost of the clauses are yet to be created. Such preliminary contract would,

16 Other terms of this protocol not quoted here in order to reduce the length of theexample, set out the obligations of the parties with respect to obtaining the necessaryauthorizations (see above Example 6) and the confidentiality of the informationexchanged (see below Example 21).

17 At least that is the solution according to French and Belgian law; for a wider viewin comparative law, see the synthesis below, pp. 35-37.


in fact, oblige the negotiators, during the continuation of their discussions,to no longer question the elements so far agreed upon. One might addthat the parties accept an additional implicit obligation to continue theirnegotiation in good faith to achieve agreement on as yet unresolved items.But how should one establish negligence or fault in this respect? Besides,what would be the criteria for the calculation of damages? In our discussion of cases and our further analysis hereafter, we will seek progressivelyto establish elements of answers to these questions.

Example 10-Protocol Relating to the Creation of an Automobile Industry

Presentation: An automobile manufacturer establishes a "frameworkagreement" with a foreign state. The preamble to this document recordsthe wishes of the state to achieve the creation and development of an automobile industry within its territory and the wish of the manufacturer toproduce its vehicles in the country in question.

"Les deux parties se sont mises d'accord sur la necessite d'atteindre les plus hauts volumes de production et de valeur ajouteelocale, Ie constructeur developpant les installations necessaires etl'Etat accordant, dans Ie cadre des conventions internationales decommerce, les protections necessaires pour donner aux vehiculesproduits localement un avantage de prix decisif sur les vehiculesimportes. Les deux parties, a la suite de negociations, sont convenues d'etablir un accord definitif, dont Ie cadre est resume parles dispositions suivantes qui engagent les deux parties."

The remainder of the protocol covers some ten pages, which, in essence,state: the purpose of the final agreement is the creation and operating ofan industrial complex for the production of cars, with parts imported fromthe manufacturer's country and later with parts manufactured locallyunder licence, or purchased from local suppliers. A local limited companyshall be formed for the purposes of acquiring the parts needed to assemble the cars and to distribute them. The size of its capital is given as well asthe respective percentages of the local (the State) and foreign shares (themanufacturer). The outline of the final contract is already planned so faras production volume and percentages of locally added value are concerned. The methods by which the development of local manufacture ofparts will be encouraged are set out. In return for exclusive licence grantedby the manufacturer and the contribution of its technical assistance for themanufacture of parts, the new company will pay a royalty that is to be fixedin the final agreement; the protocol already set out some of the elementsfor this calculation. The financing of the new company is the subject of several clauses, which contain, in particular, an estimate of the amount necessary for the construction of the factory and of the portions of this amount


that shall be financed by the new company, by foreign and by local loan.Finally, it is provided that a final agreement shall be signed within fourmonths thereby establishing the obligations of the manufacturer, which inthe protocol are merely listed in a series of headings (e.g., licences andknow-how, selection of local parts, training of personnel, prices, etc.). TheState undertakes on its part to grant the new company various rights, whichare also listed (exclusive joint production, compulsory purchase of land,exemption form customs duties, etc.). The protocol ends with a schedulefor subsequent steps: studies, signature of this final agreement, establishment of the new company, signature of the licensing agreements.

Commentary: Those who signed the protocol saw in it the consecrationof their agreement on the "economic envelope" of the operation, the "legalcontent" remaining to be established. Since exterior funds had to be raised,the protocol's publication in the Official Gazette of the Manufacturer'scountry would facilitate securing the financial package for the transaction.The final agreement, to which the protocol so frequently alludes, was subsequently signed; circumstances, however, prevented its performance.

Despite this defined opposition between the economic character of theprotocol and the legal character of the agreements remaining to bedrafted, it seems that this protocol itself gives rise to legal obligations toeach party. The preamble does expressly state that "the following provisions... bind both parties." At the level of formalities, the protocol was drawnup in duplicate and signed by each of the parties.

As in the preceding example, the agreement reached is not to be confused with the final agreement, of which many provisions remain to bedetermined. But this document sets out the state of the negotiations, summarizes in detail the results achieved and prescribes a timetable for thecompletion of the necessary contractual documents. We consider that sucha document at least obliges the parties not to question again anything thatwas already agreed upon, to respect the timetable for future negotiationsand to act in good faith to assure a successful conclusion. This proposedanalysis is the same as that for the preceding example: it seems to followeven more strongly, in view of the apparently more advanced stage of thenegotiations: Example 10 is already extremely detailed as concerns the various points of the contents of the agreements to be prepared.

Example ii-Protocol Relating to a Program forIntegrated Aeronautical Production

Presentation: Several companies from various countries decide to collaborate in the creation of a program for integrated production in theaeronautical sector. One of these companies negotiates the terms for the


overall transaction with a State, which itself acted on behalf of a group ofStates desirous to place orders. AnlOng the various companies concerned,several protocols are exchanged (the expression memorandum of understanding is also commonly used), which establish the basis for their cooperation in due course, provided the principal negotiations succeed. Theprotocols establish the major features of the respective obligations. Butmany elements are still uncertain and will be determined by the contentof the future agreement between the negotiating State and the "client"company.

Commentary: This example illustrates another situation in which documents set out the agreement between the parties on the major elements oftheir future contracts, while the precise content remains to be establishedin many respects. But in this case, the completion of the contractual set-updoes not depend primarily on the continuation of negotiations betweenthe parties; it is mainly dependent on the result of further negotiations byone of the parties with a third party. We may consider that the obligationsimposed by these protocols are not to put into question again the basesagreed except to the extent that the result of the final content of the agreement between the State and the client company may demand it, and theparticipants are to work towards the successful conclusion of these particular negotiations informed by the results of the principal negotiation.

This hypothesis is not to be confused with that of an agreement thatmight result subject to a condition precedent of the successful conclusionof another agreement with a third party (cf. above Example 6, where thecondition precedent was a governmental authorization). A contract subjectto a condition precedent is complete in all respects, subject only to the condition. In the present case, numerous aspects of the future contractual relationships remain undetermined at the stage of the protocol, since theycannot be specified until after the conclusion of the principal contract.

In this case the protocols playa part at a stage when a network of contracts is being set up. Some of the contracts must be negotiated by referenceto others. They cannot be completed before the main contract is finalized.

Example 12-0rders in Successive Lots

Presentation: In the context of the creation of an enormous program ofaeronautical production, one company sends a sub-contractor a so-calledorder expressed as follows:

"La presente commande a pour objet l'execution d'une premieretranche de 30 ensembles ... dont la commande a ete passee parnotre lettre du ... , et d'une seconde tranche de 55 ensembles ...destines aux avions ... commandes anotre societe par (tel pays).


Seule la premiere tranche est commandee ferme. La realisation dela seconde tranche est subordonnee aune cornmande de notresociete qui fera l'objet, soit d'avenant ala presente commande, soitd'une commande separee."

Commentary: This example illustrates the common existence of pre-contractual documents drafted so badly as to be incomprehensible. The letterabove manifestly contains a contradiction as to the second batch, which atfirst appears to be included in "this order," but it is then described beingsubject to a later order. One cannot stress sufficiently the need of avoidingsuch confusion.

Leaving aside the defective drafting of this letter, we find, according tothe explanations provided by a member of the Working Group, a firmorder for the first batch of work, and an announcement of the probableorder for the second batch. The terms of the second order are not to benecessarily the same as those of the first; changes may be negotiated in theevent of a change in circumstances, for example in the level of salaries.

This illustrates another situation in which the phenomenon of "lettersof intent" is apparent. In the context of long-term relations, the issue of afirm order is often accompanied by a declaration of intent relating to subsequent portions whose performance will depend on transactions to beconcluded by the author of the initial order. IS Sometimes the whole is thesubject of a global order, but it is agreed that the conditions of successivedeliveries shall be negotiated at periodic intervals. The lack of essentialterms about these future orders prevents these orders from being concluded. The Group, however, considers that the intentions expressed as tofuture batches create an obligation to negotiate their terms in good faith.

Example 13-Final Details to Be Completed

Pn!sentation: Firm A sends Firm B the following fax:

"Thank you for your fax of 13th August. We have the intention toaward the ... project to you and thus request you to send autho-

18 One may compare this situation with the practice of framework agreements, common in particular for the supply of metallurgical products or in the field of commercialdistribution, where the parties agree to organize their long-term business relations ona contractual basis (exclusivity or priority, reciprocal exchange of information, elementsgoverning the establishment of prices, quantities or minimum supplies, quality, periodsfor delivery, etc.), each individual delivery being, however, the object of separate negotiations (in order to determine especially quantity and price), consistent with the rulesestablished in the framework agreement. The future contracts are obviously not formedat the same time as the conclusion of the framework agreement, but the latter imposesprecise obligations which bind the parties in the negotiation of those further contracts.


rized representatives immediately to discuss and finalize detailsand consequently sign the contract. Best regards...."

Commentary: Compared with the previous examples, we reach here aneven more advanced stage of the negotiations. The essential part of thecontract has been achieved, and only some details remain to be settled; theparties are no longer in any doubt about a possible quick agreement. Withthe exchanges of such faxes, the parties accept the results previouslyachieved and undertake to do all necessary to settle by mutual agreementthe final details for conclusion of the final contract.

One may even wonder whether, at this stage, where all the essentialclauses have already been agreed upon and despite the use of the expression "we have the intention to award the ... project to you," the final contract has not already been achieved. The example is not very different fromExamples 3 and 4, in which only the formal contract document remainedto be settled. The only difference seems to lie in the fact that several lastdetails remain incomplete. Certain legal systems consider that a contractshould be regarded as concluded as soon as agreement is achieved on themajor points; we will return to this in our synthesis.

C. Third Group: Letters Without Binding Effect and Clauses Excluding Liability

In the second group of examples, the majority of documents examinedappeared to the Working Group to bind contractually the signatories tocontinue their negotiations in good faith, without unjustifiably re-openingthe results already achieved. It sometimes happens that documents of similar content call for a different analysis, either because the letter expresslyexcludes any contractual undertakings, or because, by virtue of special circumstances, or the absence of proper authority on the part of one of theauthors, the possibility of contractual obligations must be excluded.

Example 14-The Subject to Contract Clause

Presentation: The agent of an intended purchaser of a building writes tothe owner to confirm the outline of an agreement reached in a telephoneconversation. Various terms are set out; the main one is as follows:

"The freehold of the entire property is to be purchased at a priceof £125,000, subject to contract."

Commentary: The phrase "subject to contract" is intended in English lawto deprive the text in which it appears of all legal force. Its effectiveness iswell recognized. No contractual obligation can be derived from a document that includes this phrase. The expression is sacred (one sometimesfinds the fuller expression "subject to contract and survey"), but the same


effect can be achieved by a choice of words expressly setting out the intention not to assume any legal obligation, to put oneself outside the law. InEnglish law, the insertion of such formulae puts beyond doubt the effect ofthe documents so drafted in the course of negotiations.

Can the same be said of other legal systems? A number of members ofthe Group consider that on the European continent, just as the courts willlook beyond misleading expressions used by the parties, the tendencywould be to disregard an express wish to set oneself outside the law, if thesituation presented all the characteristics of a legal result. Should one, nevertheless, not distinguish those examples where the apparent absence ofany legal engagement results from some clumsy, ambiguous or mistakenexpression of the will of the parties (see above Examples 1-4) from thosewhere the draftsman of the document deliberately and expressly placeshimself outside the law?

Example 15-"Sans Etn: Contmctuel"

Presentation: Negotiations have started for the purchase of a m<:yority interest in several companies. The interested buyer writes to the other party:

"Nous avons l'honneur de vous confirmer que nous sommesinteresses par la possibilite d'acheter une participation majoritairequi pourrait aller jusqu'a un maximum de ... % dans les societessuivantes: ..."

The price states the total price of the operation, but "comme nous neconnaissons pas encore bien les societes en question" no purchase is envisaged before the end of the year. Nevertheless, they might proceed immediately with a management contract and an agreement for sale.

"Nous aurions bien sur, a discuter les details de tous ces documents... ; mais si notre proposition vous semble etre une base pour desnegociations, nous vous prions de bien vouloir nous retourner Iedouble de la presente lettre revetu de votre signature, qui doit etreprecedee de la mention "Bon pour lettre d'intention seulement,sans etre contractue!."

Commentary: This is an attempt to transpose into a text, governed byFrench law, the clause subject to the contract that was the subject of Example14. The effectiveness of the expression is supported by the prudent draftingof the rest of the letter, and in light of the many uncertainties that weigh overvarious other aspects of the proposed transaction. One should compare thiswell thought out expression with Example 8 ("We hereby inform you of ourintention to award you in due course the order ...").


Example 16-Misleading Acceptance of an Offer;With a Clause Excluding Liability

Presentation: A letter of award is expressed as follows:

"We hereby inform you that your company has been awarded byour organization an order for equipment, as described in yourtender. As some inconsistencies exist between your proposal andour requirements, we kindly invite you to review the technicalaspects and contract terms with us. In case no agreement isreached on all terms and no contract is signed before ... wereserve the right to cancel this award, without any right forindemnification from your part."

Commentary: In Examples 1 and 3, despite appearances to the contrary,we assumed that offers had been accepted and, consequently, that finalcontracts were concluded. Here the reverse is the case. The first phrase ofthe above letter certainly appears to provide the acceptance of the offer.But this is contradicted by the following phrase. The consensus is not complete, the contract cannot as yet be concluded and thus the discussions arestill continuing.

However, does not the preciseness of the first phrase engender certainobligations on the part of the author of the letter? The concluding clauseshows another possible means to change the legal effect of a pre-contractual document. Apart from clauses rejecting all legal effects (see Examples14 and 15), other provisions can merely envisage to limit or exclude liability in the event of the breaking off of negotiations. One should note herethat the clause can only be applied when a certain negotiation period haslapsed. According to general principles, such a clause could not be effective in the event of a fraudulent break down of negotiations.

Example 17-No Obligation and Exclusion ofLiability

Presentation: A writes to B:

"Comme suite anos precedents entretiens, nous vous confirmonsque nous envisageons d'examiner vos propositions concernant lavente des participations majoritaires que vous detenez dans lessocietes suivantes."

Also, the terms of the transaction are repeated: price, completion inthree stages.

"11 est bien entendu qu'en ce qui concerne notre societe, aucunedecision n'a ete prise relativement a cette acquisition, une telle


decision etant subordonnee a diverses considerations d'opportunite ... II est en outre entendu que dans l'hypothese OU nous nedonnerions pas suite a ces propositions ... , nous serions libres detous engagements a votre egard, etant precise que vous renoncezd'ores et deja a toute indemnite."

B acknowledges and confirms this.

Commentary: This letter brings together the two methods that appearedabove limiting the legal effect of a pre-contractual document: a statementof absence of all and any obligation is reinforced by a clause excluding liability. This clause is not superfluous since the exclusion of any contractualcommitment does not prevent an action for tort damages in the event ofan improper breach. One should remember, as well, that the clause excluding liability does not permit evading the consequences of fraudulent conduct. The text of the letter is carefully prepared with a view to providingevidence of the lack of obligation: the reference to "considerations d 'opportunite" is significant in this respect.

Example i8-Fictitious Negotiations

Pr-esentation: Two companies enter into negotiations concerning thecompletion of an extremely complex transaction. At an advanced stage ofdiscussions, the parties agree to abandon the project, but they jointlydecide to continue the negotiations nevertheless, hoping to find solutionsto the difficult problems that they had encountered. The experience thusacquired could be useful to each of them if, for example, the project wereto proceed at a later stage.

Commentary: In this extraordinary (but true) situation, the documents,which evidence the later stages and finally the result of these platonic negotiations, clearly have no legal effect. This is an exercise in method, a business game taking place and no longer the negotiation of a real contract.All intent to form a contract has vanished. Still, one should be extremelycareful to remove any ambiguity between the parties about the meaning ofthe continuation of the discussions after they were broken off (in the casein question, explicit letters were exchanged).

Some members of the Group wondered, however, whether once thefurther stages of the "negotiations" were completed, the parties would befree to use the results in contracts with third parties. Further, if the partieslater decided to attempt again to complete the project together, would theybe obliged to take the results of their fictitious negotiations as a start oftheir new discussions?


Example 19-Absence ofAuthority

Presentation: A director of Company A negotiates at length with GroupZ regarding terms for the transfer of a substantial interest that Company Aholds in Company B. Bya letter to Z, the director sets out, in detail, theresults achieved in the negotiations. Before signing the letter he adds inhandwriting:

"Subject to the approval of the Board of Directors of Company A."

When Group Z replies to the letter and confirms its agreement,Company A refuses to perform. Group Z sues Company A for breach ofcontract.

Commentary: A Belgian court refused any legal effect to the agreementreached between the director and Group Z, holding that this was subjectto a condition that was purely discretionary (the approval of the Board ofDirectors of Company A) .19 However, one may wonder whether this is notrather a question of lack of authority. A director alone does not have theauthority to bind the company where the transfer of the interests in question is concerned; the obligations, which it might claim to undertake, haveno legal effect (cf. Example 6).

This case draws the attention to a preliminary question that must beresolved before forming an opinion about a pre-contractual document: isit issued by signatories bearing the necessary powers to bind the companiesor organizations which they represent? Attention is drawn to this essentialrequirement, subject, of course, to rules, which in all legal systems andunder certain circumstances, protect third parties contracting in good faithwith an unauthorized agent. Our discussion of all the other examplesassumes that the question of authority does not arise.

D. Fourth Group: Firm Agreement About Certain Particular Aspects of theNegotiations

This final group of examples relates to situations outlined in letters ofintent in which the parties incontestably assume precise contractual obligations with regard to certain limited aspects of the negotiations.

Example 20-Exclusivity

Presentation: Initial contacts take place between two groups with a viewto the transfer of various shareholdings and trade marks. One of thegroups writes to the other:

19 The decision was appealed; the parties settled.


"Nous ... avons pris note que votre groupe envisage la possibilited'acheter ... des actions des societes ... ainsi que des marques....Min de vous permettre d'etudier cette possibilite, nous prenons conjointement et solidairement l'engagement irrevocable vis-a-vis devotre groupe de ne proceder a aucune negociation quelle qu'ellesoit ni de vendre a un acheteur eventuel tout ou partie des titres dessocietes ou marques enumerees ci-dessus, et ce jusqu'au...."

Commentary: At an apparently early stage in the negotiations, one of theparties is undertaking a precise obligation toward the other, i.e., not toenter into parallel negotiations with any third party for a certain period oftime. Whatever one may think of the legal effect of the first sentence of theletter, it appears beyond dispute that the second sentence imposes on itsauthor a contractual obligation of exclusivity (contractual upon at leasttacit acceptance by the promissee). The unilateral or reciprocal undertaking not to negotiate with any third party during the continuance of negotiations provides our first example of the various types of pre-contracts witha well defined purpose likely to arise during negotiations.

In the absence of an express agreement as to exclusivity, would not anobligation to abstain from negotiations with third parties exist implicitly?One can certainly not claim this as a general rule. Parallel negotiations arecommon currency, even at a very advanced stage of negotiations. They areeven indispensable in the normal to-and-fro of competition, and their legitimacy cannot, in general, be contested. But the situation can be differentif the parties introduce into their negotiations contractual elements that wethink can be found in some of the previous examples (Examples 9 and 13).Does not the obligation to negotiate in good faith imply an undertaking asto exclusivity? The answer must depend on the particular facts; it seems todepend on how far advanced the negotiations are and on whether theother party is or is not aware of the continuation of parallel negotiations.

An express clause, as in the present case, has the virtue of avoidingall doubt.

Example 21-Promise of Confidentiality

Presentation: A letter of understanding relating to a feasibility studyprior to contract negotiations and possible contract conclusion, includesan Article 15 according to which

"Any proprietary information, including but not limited to, technical and financial information disclosed by either party to theother hereunder and designated as confidential shall be keptsecret and confidential and not used by the receiving party other


than in the course of the feasibility studies, or other evaluationcontemplated hereunder nor disclosed by such party other than toits employees requiring same for performance of their duties hereunder, unless and to the extent such information was known to thereceiving party prior to disclosure hereunder, is subsequently disclosed to the receiving party by a third party or becomes publicknowledge. The obligations of this Article 15 shall survive termination of the letter of understanding and continue in effect for aperiod of 7 years thereafter."

Commentary: This second example of a limited contractual agreementarising out of preliminary negotiations concerns an obligation to consideras secret all information received. One should note the details of theclause, in particular the time limit on the obligation of secrecy in the eventof final breakdown in negotiations that may have been caused by competition law concerns.

As with exclusivity clauses, one may wonder whether, in the absence ofan express clause relating to the secrecy of information exchanged, anobligation to respect the confidential character of that information wouldnot exist by implication where there is an obligation to continue negotiations in good faith.

Examples 22 and 23-0bligations as to Timelines for Negotiations

Presentation: A letter of intent states that

"Considering the urgency of this project ... the contract will besigned as soon as possible after the initial discussions, and everyeffort will be made to make this possible within 30 days of thebeginning of the initial discussions."

Another letter provides that

"Within 120 days after completion of the ... feasibility study, eachparty shall inform the other as to whether it wishes to implementthe project. In the event either party fails to so inform the other,or decides not to implement the project, this letter of understanding shall be thereupon deemed terminated and neither partyshall have any obligation thereafter to the other (subject to surviving secrecy obligations)."

Commentary: Another contractual aspect of the progression of negotiations is often the fixing of periods for the accomplishment of the variousstages of the discussions, and principally for the conclusion of the definitive contract. The two examples given illustrate two different ways of for-


mulating these obligations. In the first example, the clause imposes on theparties a simple obligation to try and respect the time constraints. In thesecond case, exceeding the prescribed period acts as a condition subsequent, terminating the obligations arising from the letter of intent.

Example 24-0rganization and Payment of the Costs ofPndiminary Studies

Pn!sentation: A chemical company and a public authority in a developing country record, in a letter of understanding, their agreement to proceed with the establishment of a petrochemical complex in the country inquestion. The letter provides, however, for the completion of preparatorystudies:

"Within sixty days following the date hereof, the parties shall appointa team comprised of a mutually agreed number of representativesof each party to undertake feasibility studies for the establishment in... of a facility to produce the aforesaid products.... The costs ofthe study agreed to by the parties in advance shall be sharedequally by the parties with a net billing settlement between the parties at the conclusion of the study. If the project is implemented,the agreed costs will be borne by the .... If the project is notimplemented, the agreed costs after the net billing settlements willbe borne equally by the parties."

Commentary: Frequently, negotiators of substantial operations recognizethe need to proceed with preliminary studies to determine the feasibility ofthe project. The organization of these studies can be the subject of a contractual agreement, the two parties agreeing who shall undertake this work(in the example given it is a group of representatives of both sides, but itcould as well be one party only or a third party), what schedule to follow,who will bear the costs of the studies, whether the results lead to the realization of the project or not. The clause dealing with the cost shouldpreferably specify which expenses should be taken into account, either byproviding for reimbursement only of those expenses jointly agreed upon,or that one should apply a test as to the reasonableness of the expenses, orone might set out in advance a list of the type of expenses that would beconsidered reasonable.

Clauses relating to feasibility studies form yet another precise contractual obligation undertaken in the course of negotiations of a future maincontract.

What is the position in the absence of such a clause if one of the parties proceeds with expensive studies and the negotiations break down? Thereimbursement of such expenses would constitute an important element


of the damages whose reimbursement would be claimed either in tort, inthose exceptional cases where the breaking off of negotiations can be considered as a tort, or in contract, if the parties have expressed in a letter ofintent the seriousness of their discussions and if such a document offersgrounds for a contractual obligation to continue negotiations in good faith.Obviously, an express clause about the reimbursement of expenses will clarifY the situation.

Example 25-Acceptance to Bear the Cost ofNegotiations

Presentation: A letter of intent sets out the terms on which Company Xmight be prepared to acquire the capital of Company Z. Among theseterms are certain conditions precedent relating in particular to the resultsof an accountancy investigation and to obtaining the necessary foreignexchange permits. The letter contains the following passage:

"If, having accepted the terms of this letter in principle, and if aformal agreement is not entered into because a condition fails tobe satisfied then each party should bear its own costs. If, however,shareholders of Z should determine not to proceed for any reasonthen we feel it is appropriate that shareholders should bear thecosts of X incurred in connection with the negotiations and investigations. Equally, if X withdraws from negotiations otherwise thanfor a failure of a condition to be satisfied then it would expect tobear the costs incurred by shareholders."

Commentary: If Z gives its agreement to the contents of this letter, thepassage just quoted will provide another type of contractual undertakingdefined before the conclusion of the principal contract: an agreement thatthe party responsible for the breakdown of negotiations should bear theexpenses of those negotiations. This example resembles Example 24,except that here it is not a question of the costs of a preliminary study, butthe cost of the overall negotiations. The presence of such clause in someletters of intent tends to confirm the interpretation that documents of thiskind can create obligations relating to continuance of negotiations, andthat breach of such obligations can give rise to claims for damages. ThequantifYing of damages, in the absence of any clause, gives rise to similardifficulties, which will be considered later in this chapter. The letter hereexpressly opts for a minimal provision: the reimbursement of the costsborne as a result of negotiations. One should note that this reimbursementoccurs in the event of a break "for any reason" (except if the break iscaused by the failure of a condition), without it being necessary to establish the lack ofjustification for the break.


One should note the differences between this clause and those discussed in Examples 16 and 17 in which, by contrast, it was provided that thebreaking off of negotiations should not give rise to any claim.2o

Example 26-Authorization to Start Work

Presentation: Company A writes to Company B:

"Nous avons l'intention de vous commander les travaux complementaires prevus pour determiner la faisabilite d'un moteur agazleger, suite avotre telex du ... concernant votre proposition technique et financiere repondant anotre consultation, et qui a re<,;ul'accord des services techniques. La commande definitive ... voussera adressee des que l'avenant I au contrat No. 600330 en coursde finition vous sera notifie. Vous etes autorises par la presente lettre aengager un montant plafond de 1 175 325 FB ... couvrant lestravaux ci-dessous (suit une enumeration chiffree des travaux aentreprendre). Nous vous demandons de bien vouloir confirmervotre accord en nous renvoyant Ie double de la presente lettresigne par vos soins."

20 This clause can also be compared to clauses of American origin providing forlump-sum damages in mergers and acquisitions operations. In a letter of intent, the company to be acquired undertakes to pay a certain indemnity to the acquiring company incase of breach ("break-up fees" or "termination fees"). In the United States, such indemnities vary between 1 and 3 percent of the price of the acquisition. The validity of suchclauses can be questioned insofar as they may serve as a means to finance the acquisitionby the acquired company itself and-in relation to takeovers of listed companies-to theextent they are not compatible with applicable securities regulations (Financial Tintes,July 17-18, 1999). One may also wonder whether the Board of Directors is authorizedto sign such an agreement and whether such clauses do not go beyond the company'sobjects (d. HJ. de Kluiver, De Ondernemingsrechtelijke Contractpraktijk:Onderhandelen in de Schaduw van de wet, Conlrar:leren, 2001, 8, quoting QVC 1J.

Paramount, February 4, 1994, 637 A,2d 34 (Delaware Supreme Court». In the law of contracts, such clauses do not raise any problem when they only envisage to reimburse thecosts of the negotiation, and-in accordance with the applicable law-to determine inadvance the amount of damages due in case of breach of confidentiality and exclusivity undertakings. Difficulties appear when the clauses tend to have a dissuading effect,limiting the freedom of the company to decide whether or not to engage itself. On theother hand, the scope of such clauses is not limited to the hypothesis of a reproachablebreach of negotiations as they apply to all types of withdrawal. One may then wonder ifthey are not to be considered as exit clauses bringing negotiations to an end (d. R.Christou, Drafting CO'fn'mercial Agreements, 2nd ed., London, 1998, pp. 362-363. Compare,for instance, the prospectus stating the elements of the merger agreement between B.P.and Amoco and providing for damages to be paid in case the merger does not gothrough). In these respects, a precise qualification is only possible based on the text ofthe letter of intent and all concrete elements.


Commentary: Negotiations are very advanced, but a number of pointsremain to be settled. Nevertheless, being nearly certain that a final agreement will be reached and considering the urgency of the project, the parties decide to start performance of the contract, even though it is not yetconcluded. This situation, disconcerting under the classic theory of contract, is far from exceptional. The practice of international contracts revealsthat, quite frequently, the performance of vast enterprises proceeds toquite an advanced stage even before the contractual documents that willprovide its legal structure are completed.21 It is here that the letter of intentplays one of its most important roles. Asserting the determination of thenegotiators to conclude their work successfully, it reassures those of the parties who are to proceed without further delay with the performance of theproject. Authority to proceed is often expressly given and sometimes, as inthis example, set out with more or less precision. It constitutes another oneof these specific contracts entered into prior to the conclusion of the definitive contract. The first phase of the work is separated from the whole tobecome the subject of an agreement. The authority to proceed is no doubtthe most remarkable phenomenon in the area of letters of intent, by theway in which it puts in doubt the apparently natural distinction betweenthe phases of formation and of performance of contracts.

III. LEGAL CONSIDERATIONS

Each of the examples provided a different situation covered by precontractual documents. Was each a "letter of intent"? To give a preciseanswer to this question presupposes that there exists a well-defined conceptof letters of intent. However, the experience gathered by the WorkingGroup shows that this is not so. The expression is used by practitioners inextremely diverse circumstances and often interchangeably with other similar expressions (agreement in principle, protocol of agreement, memorandum of understanding, letter of understanding, etc.). The terms alonecannot determine the real status and effect of the document.

Faced with this terminological anarchy, the method followed by theGroup assembled, at the start, the widest possible collection of pre-contractual documents. Discussion of these examples allowed them to bedivided into two categories. Firstly, one series of documents, despite theirpossibly ambiguous appearance, seemed to fall into well-known legal categories: offer or acceptance, completed contract, contracts subject to a condition precedent, etc. The remaining documents were unclassifiable andprovided evidence of the existence, during negotiations, of various formsof agreement not known to traditional categorization.

21 See Ph. Kahn, op. cit., pp. 186--187.


The commentary, which accompanied the exposition of the variousexamples, has already stated the principal conclusions of our reflections.We will now seek to present a synthesis and to place the examples in anoverall framework, a difficult task given the serious differences that existamong the various legal systems. A particular situation does not necessarilyhave the same legal effects under all legal systems.

The first section will recall the various situations that can be broughtwithin widely recognized legal categories (Section III.A) , and the secondsection will collect the findings of the group concerning letters of intent,strictly so called (Section III.B).

A. Traditional Legal Categories

An analysis of the extremely varied documents exchanged during along negotiation reveals, once one has stripped off the qualifications resulting from the frequently imperfect expressions, the presence of variousknown legal forms.

1. Offer and Acceptance

Offer and acceptance of the offer are unilateral declarations of will,which come together in the conclusion of a definitive contract. An offerconstitutes a complete contractual proposition, to which it is sufficient toadd the adhesion of its addressee (which is the purpose of acceptance) forthe contract to be concluded. Under certain jurisdictions, an offer is considered to be irrevocable, during the period provided for in the offer, orabsent such a period, during a reasonable period. Under other legal systems, an offer may remain revocable as long as it has not been accepted.But in all cases, unqualified acceptance completes the contract and definitively binds the parties (see Example 1; and compare with Example 16).This result is generally accepted, but differences exist as to the precisemoment when, the parties not being together, the acceptance is deemed tomeet the offer. 22

22 On these various aspects of the formation of the contract in comparative law, see,e.g., R.B. Schlesinger, Forrnation oj Contracts: A Study oj the Common Core oj I~egal Systems,New York and London, 1968,2 vol.; International Chamber of Commerce, Formalion q!Conlnu;ls and Prer:onlrar:lual Liabilily, Paris, 1990; K. Zweigert & H. Katz, An Inlmdur:lion 10

Comparative Law, 3rd ed., 1998, pp. 356-364; C. Delforge, La formation des contrats sousun angle dynamique, Reflexions comparatives, in M. Fontaine (ed.), I~e processus deJorrnation du contrat-Contributions comparatives et interdisciplinaires a l'harrnonisation du droiteLlmfJeen, Brussels and Paris, 2002, pp. 139-478.


2. Promise to Contract

A promise to contract constitutes, by itself, a contractual obligation of adistinct kind. Its purpose is to commit a party to the conclusion of a definitive contract, whose elements have already been agreed upon. A bilateralpromise binds both parties to contract. In legal systems where the meetingof minds suffices to create a contract and where the validity of the contractdoes not depend upon the fulfillment of some formal conditions, a bilateral promise to contract is often indistinguishable from the contract itself.As to a unilateral promise, it only obliges one party to contract, if the otherexercises its option. 23

3. Definitive Contracts

Several of the documents examined were considered to be definitivecontracts despite some ambiguity in the terms used. Sometimes we find astraightforward acceptance of an offer (Example 1), despite the request foracceptance by the addressee. Sometimes one of the parties seeks to disguisethe reality of his obligation behind obscure terminology (Example 2).Sometimes the parties still have to prepare a formal document of theiragreement, and are mistaken about the moment at which they are bound,losing sight of the principle that, as a rule, contracts are not subject to formal requirements (Examples 3 and 4) .24

One should distinguish cases where the parties clearly declare theirintention not to assume any legal obligation (Examples 14 and 15, 16 and17). It is also possible that the parties consciously intend to derogate fromthe above principle and make the drafting of the contract a fundamentalcondition of the creation of their obligations. In cases of doubt on thispoint, the problem of interpretation encounters a wide variety of solutionsanchored in comparative law. 25 It may also occur that the law itself submits

23 In French and Belgian law, see J. Ghestin, Traite de droit civil, l"es obligations, l"e conlral:.forrnalion, 3rd ed., 1993, No. 332-342; H. de Page, Traile elhnenlaire de droil civil beZrse,II, 3rd ed., 1964, II No. 505-513. In English law, the absence of consideration deprivesa unilateral promise of binding force; in practice a remedy is found in obtaining payment of the nominal sum (e.g., £1) by the grantee of the option; see P. Ellington, TheEnglish concept of contracts, D.P. c.I., 1976, p. 484.

24 On this principle in French law, see J. Ghestin, op. cit., No. 363-384; in Belgianlaw, H. De Page, op. cit., II, No. 464 and 465; in English law, Anson's Law of Contract, 7thed., 1998, p. 78.

25 See R.B. Schlesinger, Of}. cit. I, pp. 177-182; Chitty on Conluu;ls, 26th ed., 1989, No.109; F. Kessler & E. Fine, Culpa in contrahendo, Bargaining in Good Faith and Freedomof Contract: a Comparative Study, 77 Harvard Law Rev., 1964, p. 414. The German Codeexpressly creates the presumption of an intention to make the contemplated drafting ofa final document a condition for the formation of the contract, (§ 154 para. 2): seePalandt, Hijrgerliches Geselzlnu;h, Munich, 58th ed., 1999, p. 151.


conclusion of the contract to certain form requirements, in which case themere meeting of minds does not suffice to bind the parties.

On the other hand, a letter of intent will not be confused with a definitive contract deliberately leaving certain elements to later determination(contract with open terms), nor with framework agreements, which arefinal contracts themselves, even though they will be implemented by negotiating further contracts. Those techniques, which pose well-known legalproblems, do not belong to the subject matter covered in this chapter. 26

4. Condition Precedent

A definitive contract may be concluded subject to a condition precedent. The parties will have reached complete agreement, but their agreement depends on the occurrence of some future and uncertain event, e.g.,the obtaining of the necessary authorizations from some public body(Example 6). If the event occurs, the contract becomes fully effective Andif not, no contract exists. The subject of a condition precedent must be anevent at least partially beyond the control of the parties. When one of theparties is in a position to exercise some influence over the satisfaction ofthe condition (e.g., by applying for authorization), that party is obliged todo so promptly.27 It can be useful to specify this in the contract.

The legal concept of the condition precedent is not the same everywhere, in particular so far as concerns the effects of the satisfaction of thecondition.28 On the other hand, certain legal systems make special provision in a situation in which the event, on which the effectiveness of the con-

26 Such distinctions benveen preliminary agreements of the letter of intent type andcontracts with open terms and framework contracts are analyzed by E. Allan Farnsworth,Precontractual Liability and Preliminary Agreements: Fair Dealing and FailedNegotiations, 87 Col. Law Rev. (1987), pp. 217-294;J.M. van Dunne, Verbintenissenrecht,Vol. 1, Contmctenrecht, Deventer, Kluwer, 2001, pp. 248-250; F.W. Grosheide, Naar eenfUTidisch statuut voor inteTnationale intentieverklaTingen, Molengrafica, Lelystad, Vermande,1989, pp. 119-145; F.W. Grosheide, The gentleman's agreement in legal theory and inmodern practice-The Dutch civil law perspective, in Netherlands RefJOrls to the FifteenthInternational Congress of Compamtive Law, Antwerp, Intersentia, 1998, pp. 91-114; B.Wessels, Internationale contractsonderhandelingen, in Contmcteren in de internationalepmktijk, B. Wessels & T.H.M. Van Wechem (eds.), Deventer, Kluwer, pp. 21-46.

27 This at least is our opinion; it goes further than Article 1178 of the French CivilCode, which is limited to penalizing the promisor who prevented satisfaction of the condition (see F. Terre, Ph. Simler & 1'. Lequette, Les obligations, 7th eel., 1999, No. 1130).Compare Infra, Chapter 4 regarding best efforts obligations.

28 Retroactivity in France (Code Civil, Art. 1179; see F. Terre, Ph. Simler & 1'.Lequette, Of). cit., No. 1134 and 1139) and in Belgium (same text; see H. de Page, Of). cit.,1 No. 164-168); as a rule no retroactivity in Germany (derived from BGB § 179; seePalandt, op. cit., 157).


tract depends, consists in obtaining an authorization or an approval,29 evenmaking the obtaining of such approval a condition essential to the formation of the contract.

5. Entry Into Force Clauses

Entry into force clauses, frequently found in documents exchangedbetween negotiators, can have a variety of legal effects, which only a careful analysis can fully distinguish: a clause delaying the moment when obligations become due, a condition precedent, a condition subsequent, asuspension of the obligations of one party while waiting for the performance of certain tasks by the other party, etc. Generally speaking, it wouldappear that these clauses do not prevent the creation of a contract, butthey cause variations as to the start of performance (Example 7) .30

6. Problems of Authority

Agreements are sometimes reached by persons not bearing the necessary authority. A legal person can only act through corporate bodies, officers or agents to whom the necessary powers have been granted. Similarly,a person claiming to be the agent of a physical person cannot, generallyspeaking, bind the principal except within the limits of the powers conferred upon him. The well-known legal problems raised here are extremelycomplex and solutions vary from country to country, in particular as concerns the degree of protection given to third parties who have dealt withan unauthorized agent.31 We will limit ourselves to noticing here the effectof this question so far as concerns letters of intent. As a rule, a draft agreement established by a negotiator lacking the necessary powers does notcontractually bind the principal. It can only create obligations in tort, ofthe negotiator, and in some cases the vicarious liability of the principal (seeExample 19).

B. Specific Letters of Intent

1. Legal Nature

Having distinguished and put aside the various situations just described,the collection of examples brought together by the Group still left a large

29 This is the case in German law: see §§ 182-185 of the BGB (see Palandt, op. cit.,pp.178-182).

30 See, however, N. Terki, La clause d'entn~e en vigueur dans Ie contrat internationalde longue duree en droit algerien, D.P.G.l, 1983, pp. 221-237, for whom the intervention of a public administration under Algerian law is not a mere condition precedentbut an essential requirement of contract formation.

31 For a comparative study, see Clive M. Schmithoff, Agency in International Trade.A study in comparative law-Recueil des COUTS de L'Acadernie Internationale de la Haye, 1970


number of unilateral and bilateral documents relating to the developmentof a future contract. What legal effect should be attributed to them?

One may note that the legal theory of negotiations has not developedeverywhere along the same lines or to a similar degree (a). In any case, thedifferent legal systems widely ignore the phenomenon of letters of intent:discussions in the Working Group have led to a series of reflections on thepossible legal impacts of such documents (b) but the common law is morereserved in its approach (c). Such debates are, however, ofless importancein jurisdictions where the distinction between contractual and tortious liability is less significant (d). On the other hand, the parties are in a positionto determine themselves the legal impact of their pre-contractual agreements, either to deny such agreements any legal value (e) or to provide forspecific solutions (f). These elements will be discussed below.

(a) The theory of contract formation has not reached the same degreeor stage of development everywhere, nor the same solutions, as far as thelegal status of negotiations is concerned.

A priori, as long as the contract is not concluded, the parties are notbound. It even seems normal that full freedom is preserved in a negotiation process where parties explore whether or not a contract with the possible partner is to be concluded. This is the way a competitive marketshould work.

In civil law countries, however, this freedom encounters limits. Not alltypes of conduct are permitted. Certain break-downs of negotiations mayengage their author's liability, when they occur under circumstances contrary to good faith (e.g., when the breach is accompanied by statementsharmful to the partner's reputation, or when it appears that one of the parties entered into negotiation for the sole purpose of learning businesssecrets, without having ever had the intention to reach an agreement) .32

The basis for such liability is in torts in countries like France, Belgiumor Italy.33 Under German law, the lack of sufficiently general rules on tortliability led to applying a contractual basis for culpa in contmhendo.

I, pp. 107-203. As concerns the representation of commercial companies, attention isdrawn to the Directive of 9th March 1968 Uo.C.H., 1968, No. L. 65, pp. 8-12).

32 On good faith and negotiations, see B. Jaluzot, La bonne.foi dans les wnlrals, EluJiewmfHlralive de droilfrancais, allemand eljaf)()nais, Paris, Dalloz, 2001, pp. 359-372; J.F.Romain, Themie critique du principe general de bonne foi en droit prive, Brussels, Bruylant,2000, pp. 854-865.

33 The obligation to negotiate in good faith has been codified in Italy (Article 1337C. Civ.) but its basis is to be found in tort law (Cass. it., 23 juin 1964, Giust. civ., Mass.1964, 755); see A. Braggion, Contract proposals and letters of intent under Italian law,


Common law countries are much more reluctant to admit pre-contractualliability. The dominant perception is that in a negotiation eachparty pursues its own interests. In principle, negotiators keep full discretion including the authority to break off negotiations at any time and atwill. 31 Some limits do exist, however, and the law of torts may have a roleto play. Developments are under way towards assigning more responsibility to negotiators.

The Unidroit Principles (Article 2.15) as well as the Principles ofEuropean contract law (Article 2:301) have codified the principle ofliability deriving from behavior contrary to good faith in negotiations.35

in Structuring International Contracts, D. Campbell, (ed.), The Hague, Kluwer Law International, 1996, pp. 179-192.

34 S.N. Ball, Work Carried out in Pursuance to Letters of Intent-Contract orRestitution, LQ.R 1983,590.

35 Article 2.1.15 Unidroit Principles 2004 endorses the principle of a qualified freedom of negotiators, which can be held liable for conducting or terminating negotiationsin bad faith. A party is deemed to be acting in bad faith if it enters into or continuesnegotiations when intending not to reach an agreement with the other party. A partymay also be liable if it deliberately or by negligence misleads the other party as to thenature or terms of the proposed contracts either by misrepresenting facts or by not disclosing facts, which, given the nature of the contract or the parties, should have beendisclosed. The comment in this respect emphasizes that liability as a rule only coversreliance interests but not expectation interests and that disclosure obligations are situation-based (on the status of Article 2.15, see M. Suchankova, Les Principes d'Unidroitet la responsabilite precontractuelle en cas d'echec des negociations, R.D.A.I, 1997, pp.691-702; for a critical analysis pointing to the gaps regarding Article 2.15, see]. Hager,Die culpa in contrahendo in den UNIDROIT-Prinzipien und den Prinzipien desEuropaischen Vertragsrechts aus der Sicht des deutschen biirgerlichen Rechts, inEurofliiische Verlragsrechlsvereinheillichiung ural rieulsches Rechl,]. Basedow (ed.), Tiibingen,2000, pp. 67-84). The Principles of European Contract Law contain a rule analogous toArticle 2.1.15 Unidroit in Article 2:301 but refer only to good faith, which may suggesta more objective approach to pre-contractual liability (for a comparison of both sets ofrules, see B. de Coninck, Le droit commun de la rupture des negociations precontractuelles, dans Le fnor;essus rieformalion riu r:onlral-Conlrilnllions r:omflaralives el inlenlisciplinaires (l 1'harmonisation du dTOit eUTOpeen, M. Fontaine (ed.)., Brussels, Bruylant andParis, L.G.DJ., 2002, pp. 95-112). Article 6 (3) of the draft European Contract Code prepared by the Gandolfi group (Code europeen des contrats, Livre Premier, Milan,Giuffre, 2001, 576 pp.) provides that a party acts against good faith ifit breaks offnegotiations without cause under circumstances where the parties have considered essentialelements of the contract as well as the possible conclusion of the contract, and the otherparty legitimately could rely on and expect contract formation.

On the legal status of negotiations in comparative law, see e.g., R.B. Schlesinger (ed.),ofl. cit.; International Chamber of Commerce, ofl. cit.; B. De Coninck, Le droit communde la rupture des negociations precontractuelles, in M. Fontaine (ed.), Le pTOcessus de formation du contrat, op. cit., pp. 17-137.


(b) Civil law countries all retain the principle of a possible pre-contractualliability, in spite of their differences concerning the basis for suchliability. However, such classical theories have developed without takinginto consideration the many varied documents currently examined.

The principal conclusion reached by the Working Group is that thenegotiation of a contract, which is somewhat elaborate, often gives rise tothe conclusion of various contractual agreements preliminary to the conclusion of the final contract or contracts.

These agreements, which constitute the true area of letters of intent,either deal with certain precise aspects of the negotiations or with the progressive formation of the future contract. Among the former are agreements relating to the exclusivity of the negotiations (Example 20), on thesecrecy of information exchanged (Example 21), the time periods to beobserved (Examples 22 and 23), on the achievement of preliminary studies or the reimbursement of resulting expenses (Example 24). As for agreements dealing with the progressive determination of the elements of thefuture contract, they may arise at different stages of the negotiation, in theform of either an initial and very general expression of an intent to contract (Example 8) ,36 or the listing of general bases of the future contractand different aspects to be negotiated (Example 9), or a list of the resultsachieved halfway through the negotiation (Example 10), or of the partialresults provisionally achieved while awaiting the result of parallel negotiations conducted with a third party (Example 11), or even the drawing upof the contract in almost completed form, some details scarcely remainingto be completed to perfect it (Example 13). A special place is taken by anagreement which, at an advanced stage of negotiations, authorizes one orother of the parties to start performance of the contract (Example 26).

Certainly not all negotiations, however substantial, give rise to the formation of such "contracts to negotiate." However, looking at the numeroussituations that appear in the collected letters of intent, one must considerthat the compleXity of the negotiations, their length, the costs they involve,the need to coordinate various complementary negotiations, often lead theparties to provide their negotiations with an element of security by theinsertion into a contractual framework of various obligations as to the procedure of the negotiations or of certain results already achieved.

How should one identify such passage from a legal no-man's land intocontract law? The criterion is probably to be found in the will of the parties. Finding the existence of such a will is a matter of interpretation. In

36 In fact, as to the precise reservations contained in the text of Example 8, theGroup hesitated, nonetheless, to see in this example the indication of a contractualobligation.


many cases, it appeared to the Working Group that the drafting of a special document, listing the terms of the agreement and signed by both parties (or of a letter addressed by one to the other, inviting the latterexpressly to approve its contents) showed the existence of such a will topass onto a contractual level.37 It is here that the major effect of many letters of intent and other similar documents becomes apparent.

This approach was followed by the Commercial Court of Brussels inthe Dupuis case. In spite of an agreement in principle concerning thetakeover of its firm by G.B.L. and Hachette, Dupuis completed the operation with the Editions Mondiales. Mter a thorough analysis of this agreement in principle, the Brussels Court decided that this document createda contractual obligation to continue the negotiation in good faith. Underthe circumstances, the Court considered that Respondent Dupuis did notact in good faith when brutally breaking off the negotiations in order toconclude the contract with a third party in violation of the agreement inprinciple. Such an agreement, according to the Court, constitutes a contractual basis for remedies in breach of negotiation.38 Although it does notcite the report that the Working Group had published in 1977, this decision indirectly seems to have been inspired by it.

Another Belgian decision stated the opposite. In the FM. C. Corporationcase, the Court of Appeal of Brussels reversed a decision of the BrusselsCommercial Court and gave a restrictive interpretation to a letter of intent:since it did not contain all the essential elements of a contract, the lettercould provide no ground for contractual liability. 39

More recently, an arbitral award rendered under the ICC Rules gavea very elaborate analysis of a memorandum of understanding. The tribunaldistinguished two types of provisions. Some are considered final agreements, binding upon the parties. As to the other provisions, describing ingeneral terms the parties' intention to conclude certain agreements, thetribunal "considers that when the parties agree upon general issues to beimplemented by them at a later stage they cannot be released from theirobligations to use their best efforts to ensure that such general issuesbecome specific terms of contracts to be executed by the parties." Referring

37 Certain members of the Group emphasised the difference in effect felt by partiesbetween such documents and mere minutes of meetings.

38 Comm. Brussels,June 24, 1985,](JLan. Trib. (Brussels), 1986,236: also see Comm.Brussels (ir~unctive proceedings), November 27, 1984, ]ou,rn. Trib. (Brussels), 1984, 721.

39 Brussels,June 14, 1984, Rev. Cmnrn. Belg., 1985,472. Concerning the F.M.C. case,see F. De Ly, Letters of intent under recent Belgian case law, case note under Court ofAppeal of Brussels, June 14, 1984, Cour de Cassation, April 17, 1986 and Court ofAppealof Liege, October 20,1989, Dir: Cornrn. Ini., 1990, pp. 707-711 and R.D.A.I., 1991, pp.566-568.


to Article 5.1.4 of the Unidroit Principles, the second paragraph of whichestablishes the scope of duties of best efforts in international contracts, thetribunal decides that"... the general description of the parties' intentionsto reach agreements on certain issues contained in the MOU obligates theparties to exert their best efforts in order to have such intentions becomedefinite terms of Contracts legally binding for each of them."4o This award,thus, confirms that undertakings to negotiate embodied in letters of intentmay in certain circumstances be of a contractual nature.11

(c) In this area, English law appears not to develop along the line ofcontinental systems. English members of the Group have generally beenmore reluctant than their colleagues to recognize a contractual characterto those various agreements attained during negotiations. It may berecalled that English law does not have a general theory of pre-contractualliability in torts. Perhaps English courts could admit the contractual natureof such agreements that deal with precise matters, such as exclusivity12 orconfidentiality, subject to the existence of consideration. At the presentstage of development of English law, the idea of a contract to negotiatedoes not seem to be in conformity with dominant conceptions.

However, developments are not inconceivable in the middle term.English courts have always been sensitive to commercial practices, and thecurrent development of letters of intent, together with the recent attentiongiven to the concept of good faith,43 could generate a new awareness anddevelopments in the field. A member of the Group wrote: "In general,English courts are prone to give effect to the presumed intentions of parties and an intention to negotiate in good faith would appear to be a reasonable inference to be drawn of their intentions in signing such letter."

40 ICC award No. 8331,journ. Dr. Int., 1998, 1041, obs. Y Derains, Bull. Cour Int. Arb.CCI, 1999, vol. 2, 67.

41 See also the ICC award rendered on September 4, 1996, [}n~r Law Rev., 1997,600,where the tribunal deliberately chose to apply a legal system that enforced an obligationto negotiate in good faith contained in a pre-contractual agreement. The law of the Stateof New York was chosen in that context; the tribunal also made reference to the UnidroitPriciples.

42 In Wa1:ford v. Miles (1992) AC. 128, the House of Lords has recognized such a contractual obligation, provided it is limited in time.

13 It is possible that English case law will be influenced by the notion of good faith,but it may be integrated in the law of torts (perhaps through the concepts of negligenceand even more of negligent misrepresentation), the law of quasi-contracts (restitution),the law of contracts (through the notion of implied contract terms, and for groups ofcontracts, through the concept of collateral contract) and some aspect of equity, such aspromissory estoppel. On good faith in English law in general, see Good Faith and FaLlJt inContract Law,]. Beatson & D. Friedman (eds.), Oxford, Clarendon, 1995,531 pp.; GoodFaith in Contracts, R. Brownsword, N. Hird & G. Howells (eds.), Aldershot; Ashgate, 1999,336 pp.


But he added: "For the moment, however, these are speculations, as thereare no present indications that the law will develop along these lines in theshort term. "44

Two remarkable decisions nevertheless exemplify the traditional reluctance of English courts to assign any legal status to letters of intent. In thefirst case, Cleveland Bridge had informed British Steel of its intention toconclude a contract, and authorized its partner to start the work withoutany further delay. The court still considered that no contract had been created by the letter of intent, in spite of the fact that one of the parties hadstarted to perform.45 More recently, in Walford v. Miles,4G the House ofLords considered that English law does not accept contracts obliging tocontract and, therefore, no contracts to negotiate. The main reasons givenare, on the one hand, the freedom of businessmen to decide whether ornot to bind themselves and, on the other hand, the inherent uncertaintiesin the determination of contractual contents should the parties fail toagree. This decision has been widely criticized.47

(d) At stake in the above discussions is whether letters of intent may, incertain cases, be recognized to have a contractual status and lead to contractual liability in case of breach of the undertakings expressed, orwhether they can be relevant only in terms of a possible liability in torts.

If a letter of intent were to be characterized as only relevant for tortpurposes, such characterization would remain relevant. In this respect, letters of intent mark the seriousness of the parties' negotiations, record thepoints of agreement as well as the bases for further agreement. As such,they may constitute important elements of evidence for a tort claim againsta party breaking off negotiations. 48 It remains that many letters of intent

44 See also Chitty on Contracts, 6th ed; 1989, No. 116, where the possibility that courtsimbue letters of intent with a contractual character was already evoked.

15 British Steel Corp. v. Cleveland Bridge & Hngineering Co., (1984) 1 All E.R. 504 (Q.B.).

46 (1992) 2 A.c. 128.

47 Cf. Anson sLaw of Contract, op. cit., pp. 65-67; N. Cohen, Pre-Contractual Duties:Two Freedoms and the Contract to Negotiate, in Good Faith and Fault in Contract /"aw,].Beatson & D. Friedman (eds.), Oxford, Clarendon, 1995, pp. 25-56 and the referencesat note 41. For an analysis from the Italian point of view, see A. Mad & L. Simonetti,Agreements to Agree, agreements to negotiate ed obbligo precontrattuale di buona fedenel diritto inglese e nel diritto nord-americano (analisi comparativa alIa luce di unarecente sentenza della House of Lords), /)ir. Cormn. /nt., 1992, 601-629. Attention willalso be drawn to the arbitral award rendered on September 4, 1996, according to whichthe obligation to negotiate in good faith would be enforceable according to the law ofthe State of New York (Uni): Law Rev., 1997,600).

18 Compare E. Dirix, Le "gentlemen's agreement" dans la theorie du droit et la pratique contemporaine, Rev. Dr: Inl. Dr: CmnfJ., 1999, pp. 242-244, who makes a distinction


also include undertakings that may be characterized as being contractualin nature, and thus, a significant qualitative difference may exist betweenany such letters of intent and those not containing contractual commitments, which are merely relevant from a tort perspective.

However, this distinction and attendant qualification only matters inasmuch as the rules governing contractual liability and tort liability respectively differ. This is, for instance, not the case in The Netherlands, whichexplains why Dutch law is not so much concerned about this characterization issue and why in that jurisdiction contractual, non-contractual and suigeneris (i.e., a specific relationship between parties governed by good faith)can coexist without any problem.

(e) Whatever the applicable law, the situation is, of course, clearerwhen the drafters of a letter of intent have taken an express position as tothe nature of their agreement. Thus, the wish to have some legal effect issometimes expressly confirmed by the parties (Example 5). Sometimes, onthe other hand, it is expressly denied (Examples 14, 15 and 17), or clearlyexcluded by the context (Example 18) .19 At other times, the parties inserta clause excusing them from any liability in the event of a breakdown oftheir negotiations (Examples 16 and 17).

A clause excluding all legal obligation (subject to contract), and allother formulae indicating the wish of the parties to place themselves outside the law, are recognized to be fully effective in English law.50

In American law, contract clauses have also been considered as valid,but their efficacy may be affected if contradicted by a party's conduct. S1

However, the application of such clauses is much more qualified in theUnited States than in England.52

This is demonstrated by the spectacular Texaco v. Pennzoil case in whichTexaco was sentenced to pay what was then the highest award ever granted,

between agreements in principle imposing contractual obligations and "pure" letters ofintent which only give rise to liability in tort.

49 See, however, the questions raised by the Group in the commentary on Example 18.

50 See Rose and Frank Co, v. Crompton Brothers Ud. (1925) A.C. 445; Walford v. Miles(1992) A.C. 128; Chitty, op. cit., No. 79 and 92. Compare the different interpretationsquoted by B. Hanotiau, M. Demideleer & N. Gerryn, Vers la conclusion du contrat: leselements caracteristiques de la convention et les pouvoirs des negociateurs, Assoc. belgedes fur. d'entrepJ:, 1987, pp. 106-111.

51 See the cases analyzed by W.H. Holmes, The Freedom Not to Contract, 60 TulaneLaw Rev., (1986), pp. 751-798.

52 See B. Hanotiau, M. Demideleer & N. Gerryn, op. cit., pp. 106-111.


13 billion U.S. dollars, reduced on appeals to one billion! Mter Pennzoilhad launched a takeover bid against Getty, a memorandum of agreement wassigned on January 2, 1984 between Pennzoil and Getty's two main shareholders, with the intent that the former firm merge with the latter. Theagreement was signed "subject to approval by the Board of Directors (ofGetty)"; approval was granted on January 4. The parties then announcedthe conclusion of an agreement in principle and added "the transaction is subject to execution of a definitive merger agreement." On January 6, afterrapid secret negotiations, another notice announced the acquisition ofGetty by Texaco. This was the beginning of lengthy proceedings. Pennzoilfirst tried in vain to obtain specific performance of the memorandum of agreement in a Delaware court. It then sued before Texas tribunals, seeking sevenbillion dollar damages from Texaco, plus an additional seven billion punitive damages, for the tort of having induced Getty to breach its contractualundertaking ("intentional interference with contractual relations").

The solution of the dispute depended upon the value given to thememorandum of agreement. The jury found this agreement valid, and sentenced Texaco to pay ten billion dollars damages and three million dollarsin punitive damages. On appeal, damages were reduced to one million dollars.:"i3

This case illustrates the relativity of subject to contract clauses in Americanlaw, as well as the limits to parallel negotiations and the risk a third party runswhen knowingly interfering with ongoing negotiations. The irony in thePennzoil case is that Texaco was punished, while Getty's shareholdersescaped any sanction for lack of a basis for contractual liability.

Would a clause claiming to deprive an agreement of all legal effect bevalid under civil law systems?

The Group expressed some doubts about its validity in French law (seecommentaries to Example 14). The opinion was nevertheless expressed thatthe new Article 12 paragraph 4 of the French Code of Civil Procedure, whichpermits the parties to make characterizations of their relationships that arebinding a judge, should also permit them to make effective declarationsdepriving any agreements they may have reached of any contractual effect.!J4

53 Texaco Inc. v. Pennzoil Co., 784 F2d 1133 (2d Cir. 1986). On this case, see U.Draetta, Criteri redazionali di littere di intento alla luce dei casi Pennzoil e SME, Dir.Comrn. Int., 1987, pp. 243-249, and from the same author, The Pennzoil Case and theBinding Effect of Letters ofIntent in the International Trade Practice, R.D.A.I., 1988,pp. 155-172; see also E. Chamy, L'affaire Texaco-Pennzoil et ses multiples developpements au sein du systeme judiciaire americain, Journ. Dr; Int., 1988, pp. 979-1006.

51 Cf. B. Mercadal & Ph. Janin, I~es contracts de cooperation inter-enterprises, 1974, No.43; F. Osman, Les !Jriru;i!Jes g/;neulux de la lex mercatoria, Paris, L.G.DJ., 1992, p. 58.


It has also been suggested that a distinction should be drawn between a situation where the apparent absence of any legal effect results only from theclumsiness or ambiguity of the expressions used to describe the parties' will(Examples 1 to 4), and a situation where draftsmen declare with completeclarity that the letter of intent shall have no legal effects.55

In France, courts also admit the validity of gentlemen's agreements andsimilar undertakings ("engagements d'honneur') , but a Frenchjudge does notconsider himself automatically bound by the parties' expressed will if thefacts are to the contrary.56 A Belgian author drew up a systematic list oftypes of agreements that are outside the law, or which the parties considerso, with particular attention to letters of intent. This author considered thatajudge must respect the parties' expressed will to remain outside the law,subject to public policy and mandatory provisions.57 On the other hand, aDutch study, with many comparative ramifications, notes that gentlemen'sagreements are usually considered non-binding, which does not necessarily deprive them of all legal value.58 On this point, the very expression that"the parties chose to remain outside the law" can be criticized, since theparties may certainly stipulate that their agreement cannot be qualified asa contract, but negligent behavior remains legally relevant, at least wheretort liability is concerned.

As for a clause excluding liability, its effectiveness should generally beaccepted, but subject to such qualifications as particular legal systems mayapply. At least it appears that such a clause cannot free its author of theconsequences of fraudulently breaking off negotiations.59 One will notethat the clause itself constitutes an agreement of a contractual character.

(f) Analyses of letters of intent are often based on an all or nothingmodel. Such documents are qualified either as contracts to negotiate or asnon-contractual instruments, possibly relevant only with respect to tortiousliability.

The above analysis has shown that international practice does not confirm such a simplistic division; the same instrument can include elements

55 On the tendency of businessmen to remain outside the realm of the law, see S.Macauly, Non-contractual Relations in Business. A Preliminary Study, 28 Amer. Sociol. Rev.(1963), pp. 55-67; L. Bernstein, Opting Out of the Legal System: Extralegal ContractualRelations in the Diamond Industry, 21.Journ. ofLegal Studies (1992), pp. 115-157.

56 See B. Oppetit, op. cit., pp. 107-116.

57 E. Dirix, Gentlemen's agreements en andere afspraken met onzekere rechtsgevolgen, &chts. Weekbl., 1985-86, col. 2119-2146; E. Dirix, Of). cit., pp. 223-245.

5S B. Wessels, Gentlemen's Agreements Regulating Business Relations Under DutchCivil Law, Netherl. Int. loaw Rev., 1984, pp. 214-254.

59 Cf. infra, Chapter 7, pp. 384-385.


of both types. In recent years, drafting practice has developed two techniques that reflect this dual character of letters of intent.

The most common technique consists in inserting a specific clause inthe letter of intent enumerating the provisions with contractual value.Confidentiality and exclusivity clauses frequently appear in such lists, aswell as clauses concerning applicable law and dispute resolution (arbitration, forum selection). By specifying binding clauses, the parties indicatethat they intend to be bound by them. Besides, if the negotiation fails, suchclauses may serve functions similar to those of obligations surviving thecontract. GO

The other technique, less frequent, consists in dividing the letter ofintent into two parts, one with non-binding elements and the other onewith contractual provisions.

Such techniques demonstrate a definite sophistication of the draftingof letters of intent as well as a maturation of contractual practice.

2. Contracts to Negotiate: Principal Legal Problems

When negotiators specifically express agreement on the developmentof the negotiation process or some of its aspects and do not claim to stayoutside the law, the interpreter, in many cases, will be in a position to discern contractual elements preceding the conclusion of the contract beingnegotiated.

If one accepts the appearance of such contracts in the course and context of negotiations, one must still set out (a) their contents, (b) the criteriafor what constitutes a breach of contract and (c) the remedies open to aninjured party in the event of wrongful non-performance. A few brief reflections will address the effect which letters of intent may have at a later stage,where negotiations have resulted in the conclusion of the contract (d).

(a) Contents. What obligations do such contracts, created in the courseof negotiations, engender for the parties?

The answer is relatively straightforward so far as concerns the firstgroup of such contracts, relating to certain specific aspects of negotiations. G) Their purpose is often expressed precisely; e.g., not to enter into

60 Cf. infra, Chapter 13.

61 In this respect some authors distinguish between temporary agreements and partial agreements; d. J. Schmidt, Negociation et conclusion de contmts, Paris, 1982, No.455-484; cf. also, from the same author, Preliminary Agreements in InternationalContract Negotiation, 6 IIouslonI ofInl. Law (1983), pp. 37-62, La negociation du con-


parallel negotiations with competitors, not to divulge confidential information revealed in the course of discussions, to follow the time limits provided for the various phases of the negotiation, to carry out preliminarystudies or to share the burden of their costs in agreed proportions.

The problem is more complicated as regards agreements relating tothe progressive elaboration of the future contract. Where a letter of intentsets out the agreement of the parties on certain clauses of their comingcontract, the undertakings accepted are clearly not those of performingthese clauses yet. This raises the question as to the effect of the agreementreached so far? From the discussions of the Group, the opinion emergedthat the basic obligation assumed by negotiators who put their debatesonto a contractual level is to continue negotiations in good faith, taking allnecessary steps toward their completion.52

The content of such an obligation to negotiate in good faith, however,needs to be analyzed more precisely. The classical theory of culpa in contrahendo already refers to the requirement of behaving in good faith duringnegotiations. The expression contracts to negotiate that one may discover insome letters of intent should give such good faith a more substantial content. This content certainly does not have the same tenor depending onwhether the letter of intent is issued at an initial stage of discussions or ata very late stage. The requirement to negotiate in good faith grows gradually along with the progress of the negotiations.

An initial common intent to seek agreement expressed at the start cannot involve more than an obligation to meet, and to engage in negotiationswith a constructive attitude (compare Example 8, whose contractual character is doubtful). But where discussions have really started and have begunto produce certain results, a letter of intent, which records the agreementon the results so far achieved, seems to involve an obligation not to question these any longer, except by common agreement should this shouldbecome necessary due the progress of the discussions, or by developmentsin complementary negotiations with third parties, as in Example 11.

trat international, D.P.C.!., 1983, pp. 239-260, as well as L'evolution de la responsabiliteprecontractuelle en droit fran~ais, in G. Weick (ed.), Hntwicklung des Deliktsrechts inredllsvergleichenderSicht, A. Metzner~ 1987, pp. 141-166. Another classification of preliminary agreements is found in M. Vanwijck-Alexandre, La reparation du dommage dansla negociation et la formation des contrats, Ann. Fac. nr; Liege, 1980, pp. 34-39.

62 For this argument see J. Van Uytvanck, La Pratique d'entreprises belges enmatiere de contrat international, in Le Contrat eaJnornique international, Bruxelles & Paris,Bruylant-Pedone, 1975, p. 397. But compare with doubts of Belgian practitioners regarding the real effect of letters of intent revealed in the same work by the inquiry of M.Verwilghen & F. Ravet-Gobbe, id., pp. 355-356.


The nearer the issue of such a letter to the anticipated end of discussions, the more such a letter of intent imputes an obligation to accept theearlier results of the negotiations stated in the letter. 63 The obligationwould seem to reach its highest level of strength where the letter of intentalready authorizes a start in performance of contractual obligations whilethe contract itself is not yet concluded (Example 26).

The general obligation to negotiate in good faith, deriving from a contract to negotiate, involves also various duties such as to inform the otherparty correctly of the various elements relevant to it/j1 to refrain from making any clearly unacceptable proposals necessarily leading to the failure offurther discussions, not to prolong negotiations by encouraging false hopesin the mind of one's partner after the decision to break off discussions hasbeen taken. 65 It would seem also that even in the absence of any explicitclause, the obligation to negotiate in good faith imports certain of theduties that are sometimes the object of such special agreements as havealready been mentioned (e.g., collaboration of each party in relation to theconclusion of negotiations within a reasonable time (compare Examples 22and 28), respect for the confidential character of information received(compare Example 21), even perhaps an undertaking not to carry out parallel negotiations with third parties without the knowledge of one's partner(compare Example 20).66

Some of these obligations would appear to be imposed on negotiators,even in the absence of any contract to negotiate. In the tradition of romanistic countries they may be sanctioned by tort liability.57 It has been recalledthat culpa in contrahendo is also related to the requirement of behaving ingood faith during negotiations. But where the relationship between thenegotiators may be characterized as contractual, these obligations arestronger (the stronger the later the stage in the negotiations) and moresubstantial than merely to refrain from certain reprehensible conduct.Under such a characterization, the main obligation emerging from allthese different facets of a contractual duty to negotiate in good faith, is tocollaborate in search of a successful conclusion of the negotiations. 68

63 Cf. J. Ghestin, Traite de droit civil, t. II, Les obligations, Le contrat: formation, 2nd ed.,1988, No. 240-242 who qualifies such undertakings as partial agreements.

61 Compare M. deJuglart, L'obligation de renseignement dans les contrats, Rev. Trim.Dr: Civ., 1945, pp. 1-22; F. Terre, Ph. Simler & Y Lequette, Of). cit., No. 178-182; F. Kessler& E. Fine, op. cit., pp. 404-405 (duties of disclosure); P. Engel, Traite des obligations en droitSuisse, 2d edition, 1997, pp. 187-188; B. Mercadal & Ph. Janin, op. cit. No. 30.

65 See P. Engel op. cit. pp. 136-137.

66 J. Van Uytvanck, of). cit., p. 397.

67 See B. Mercadal & Ph. Janin, op. cit., No. 29-33.

68 This approach was retained by the Commercial Court of Brussels, in the Dupuiscase described above.


(b) Establishing Breach. The rules for establishing breach of contractare far from easy to determine in such a new subject matter. Furthermore,they will not necessarily be the same whatever the applicable law, the rulesof contractual liability often present important differences from one country to another.

In French law it appears that the general obligation to negotiate ingood faith is an obligation of best efforts,G9 each negotiator having to takeall steps appropriate to achieve success in the negotiations. The undertaking is not that one will succeed but that one will do all one can to succeed.A breach, to be proved by one's partner, would consist of conduct contraryto that expected of a diligent and constructive negotiator.7o

There is growing intensity in the requirement to negotiate in goodfaith as negotiations progress; correspondingly, the definition of breachalso evolves: particular conduct, acceptable at the stage of a letter of intentissued at the beginning, will no longer be so when the parties have almostclosed their negotiations.

It would appear that the results would not be very different in the common law, subject to developments towards recognizing a contractual character in certain undertakings expressed in letters of intent. An Englishmember of the Group is of the opinion that breaches would then be evaluated by reference to the diligence required from a reasonable man putunder the same circumstances. 71

The best efforts nature of undertakings contained in letters of intenthas been retained by a recent arbitral award, already mentioned above. Aparty was accused of having failed to contribute in good faith to the conclusion of an agreement envisaged in a memorandum of understanding. Inorder to characterize obligations to negotiate in good faith, the tribunalmade express reference to Article 5.1.4 of the Unidroit Principles, the second paragraph of which defines the scope of obligations of best efforts:"The Arbitral Tribunal ... rules that the general description of the parties'intentions to reach agreements on certain issues contained in the MoU

69 On the distinction between the obligations as to the means and obligations as tothe results (obligation de resultat), see infra, Chapter 4, pp. 218-222.

70 See the proposal of Batonnier Lambert Matray that one should consider whetherthe conduct is manifestly wrong in f).p.e!. 1976, pp. 478-480.

71 Compare the brief allusion made to this problem by A.M. Dugdale and N.V Lowe,Contracts to Contract to Negotiate,.Journ. Bus. Law, 1976, pp. 34-35. In American law,d. the suggestions made by the letter ofR.D. McGrew, D.P.C.I. 1976, p. 482; compare E.Allan Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealingand Failed Negotiations, 87 Col. !~aw Rev. (1987), pp. 217-294.


obligates the parties to exert their best efforts in order to have such intentions become definite terms of Contracts legally binding for each of them."72

However, certain aspects of contractual obligations derived from lettersof intent appear to involve stronger obligations, as obligations to achievespecific results (Unidroit Principles, Article 5.1.4(1)). One may refer in thisrespect to commitments not to re-open matters already agreed upon, toobserve the confidentiality of information provided, and not to enter intocompeting negotiations with third parties.

(c) Remedies in the Event of Breach. One of the signatories of a letterof intent breaches the obligation to continue the negotiations in goodfaith: he breaks off negotiations without further justification, or at leastceases constructive cooperation in search of an agreement. What are theremedies available to his partner?

1. Intervention of an Arbitrator or aJudge. The questions arises whether anaggrieved party can obtain an order from an arbitrator or ajudge that theother party be obliged to resume the negotiation, or even to conclude theagreements that were to be negotiated. Even in legal systems permittingspecific performance, this will hardly be possible. It is difficult to compelsomeone to resume negotiations. Also, no obligation to reach agreementson the envisaged contracts is conceivable, since the letter of intent onlyobliged negotiation in good faith, with no assurance of success. The mostadequate remedy will normally consist of damages.

These principles have been confirmed in the Dupuis case.73 Since Dupuiswas held liable for a contractual breach for not having pursued the negotiation, the specific performance requested (i.e., transfer of the shares at staketo Claimants C.B.L. and Hachette) was denied, since an agreement in principle does not oblige concluding the contract, but only negotiating in goodfaith. The tribunal noted that the proper remedy would be damages, butthose were not awarded since they had not been claimed. On the contrary,damages were granted by an arbitral award also mentioned above, as a remedy for the failure to have exerted one's best efforts towards the conclusionof an agreement envisaged in a memorandum of understanding.74

7'2 ICC Arbitral award No. 8331,.!ourn. Dr; Inl., 1998, 1041, obs. Y Derains, Bull. Cour;Int. Arb. CGi, 1999, Vol. 2, p. 67.

73 Comm. Brussels,June 24, 1985,journ. Trib. (Brussels), 1986,236; also see Comm.Brussels (injunctive proceedings), Nov. 27, 1984,journ. Trib. (Brussels), 1984,721.

74 ICC arbitral award No. 8331,.!ourn. Dr; Int., 1998, 1041, obs. Y Derains, Bull. CourInt. Arb. CCI, 1999, Vol. 2, 67; compo J. Schmidt-Szalewski, La force obligatoire al'epreuve des avant-contrats, Rev. Trim. Dr. Civ., 2000, pp. 29-38.


Could one not imagine that, in legal systems familiar with such a mechanism, the failing party could be obliged to resume negotiating loyallyunder threat of a judicial penalty (a so-called astreinte; see UnidroitPrinciples, Article 7.2.4)? Such remedy would hardly be productive: the failing negotiator can perhaps be compelled to resume negotiations, but notto bring them to a successful end.

Considering the impossibility to oblige the failing party to offer constructive cooperation, another remedy comes to mind: could a third partybe entrusted with undertaking the functions of the contesting parties inorder to finalize the agreement? If need be, the letter of intent could provide for the intervention of an arbitrator in order to complete the contractin the event of disagreement between the parties (see Example 5) .75 Failingthis, might not a judge make good the default of one of the negotiators?

Generally speaking, the answer is no. A contract can only result fromthe mutual agreement of the parties and ajudge cannot substitute for this.

But might the situation not be different if the breach occurs at anextremely advanced stage of the negotiations, where an agreement hasbeen reached on the principal elements of the contract and only secondarypoints remain to be settled?76 The Swiss Federal Code on obligations contains, in this respect, a remarkable provision: "If the parties have reachedagreement on all principal points, the contract is to be consideredachieved, even where secondary points have been reserved. In default ofagreement on the secondary points, the judge is to settle them taking intoaccount the nature of the matter" (Article 2) .77 The German Burgerliches

Gesetzbuch (§ 154) as well as the Unidroit Principles (Article 2.1.13) arriveat the opposite solution.

The question has to be examined as part of the general and very complex discussion between essential, substantial and accessory elements of a

75 The intervention of arbitrators in connection with the formation of contracts wasdiscussed by E. Bagliono & G. D'Amely Melodia at the IVth International ArbitrationCongress (Moscow, 1972). Also see B. Mercadal & Ph. Janin, Of}. cil., pp. 26-27. Comparewith the evolution of the role of arbitration discussed in relation to hardship clauses,infra, Chapter 9, pp. 490-491.

76 Here the situation is envisaged where the parties had shown an intention to negotiate these secondary points. It is, in fact, extremely frequent for parties to fail to negotiate these minor aspects of their agreements relying upon the rules implied by law; insuch cases the conclusion of the contract is not in doubt (d. RB. Schlesinger, op. cit., 1.pp.85-86).

77 See P. Engel, Of}. cil., pp. 156-157; see also G. Bernini, Techniques for Resolvingthe Problems in Forming and Performing Long Term Contracts, D.P. C.l 1976, p. 497.The Algerian Civil Code (Ordonnance No. 75-58 of September 26,1975) contains a similar provision (Art. 65).


contract. In general, legal systems require the parties' agreement on theessential elements in order that the contract be concluded, but they consider that the lack of agreement on accessory points does not prevent formation of the contract. The intermediate zone is that of elements, whichmay appear as secondary, but about which parties had accepted the necessity of an agreement before the contract could be completed (such elements thus becoming substantial). In this context, taking into account thesolution given by the applicable law, one may envisage a possible determination by an arbitrator or a judge of the secondary points upon which parties have not been able to agree. 78

2. Assessment ofDamages. The cases where the completion of negotiations that have broken off can be entrusted to a third party, arbitrator orjudge, are probably very rare. In most cases, particularly if discussions werenot very advanced, the only remedy of the party injured by an unjustifiedbreach is to claim damages.79 But how should they be quantified? Shouldone only consider the damage flowing from the cost of the abortive negotiations, or may one also take into account the loss of profit that would haveresulted from the contract?

78 On these distinctions between essential, substantial and accessory elements incomparative law, cf. C. Delforge, op. cit., pp. 430-437. It is often stated (we did so ourselves in the first edition of this book, p. 42) that Article 2 of the Swiss Code ofObligations would apply the theory of punctatio, contrary to § 154 of the German CivilCode, which would reject that theory. This is a misunderstanding (d. C. De1forge, op.cit., pp. 461-474). These two provisions take opposite positions on the classical questionof lack of agreement on secondary elements made substantial by the parties. On theother hand, the theory of punctatio considers that a contract does not necessarily cometo existence at once, but in successive layers, along with the progress of negotiations (seeJ. Carbonnier, case note under Casso fr., March 24, 1958,jur. Class. Per., 1958, No. 10868;G. Faljat, Theorie des obligations, 1975, pp. 130-131; G. Schrans, op. cit., pp. 23-25; J.Schmidt-Szalewski, Les letters d'intention, I.B.LJ, 2002, pp. 266-270); it is meant to bean alternative to the traditional view according to which a contract necessarily resultsfrom the acceptance of an offer. This approach is subject to growing criticism (d. J.Bonell, The Vienna Convention on International Sale of Goods, in Formation oj Contractsand Conlnu;lual Liabilily, Paris, International Chamber of Commerce, 1990, p. 159; E.A.Farnsworth, General Report, in General Forrnalion o!Conlnu;ls . .. , id., p. 17; M. Fontaine,Offre et acceptation, approche cIepassee du processus de formation des contrats?, inMelanges ofJerts au ProJesseur P. van Omrneslaghe, Brussels, Bruylant, 2000, pp. 115-133).Thus, properly understood, the theory of punctatio casts an even more interesting lighton the phenomenon of letters of intent.

A possible intervention of an arbitrator or ajudge to complete the elements ofacontract on which the negotiation has failed should not be confused with the problemsrelated to elements ofa contract the determination of which was deliberately postponeduntil performance (contracts with open terms).

79 Cf. M. Vanwijck-Alexandre, La reparation du dommage dans la negociation et laformation des contrats, Ann. Fac. Dr. loi~ge, 1980, pp. 24-34.


The letter of intent may provide an answer to the question by anexpress clause fixing the amount of the compensation (Example 25), orexcluding all indemnification (Examples 16 and 17, subject to the reservations mentioned above).

In the absence of a contractual provision, what should be decided andon what grounds? The answers are both diverse and uncertain in comparative law.8o

Since Jhering, German theory distinguishes between negative damages,(Ver-trauensschaden) and positive damages (Erfullungsinteresse). The formerare intended to put the injured person back in the same place where hewould have been if no negotiation had even occured; the latter seeks tocompensate for the lack of performance of the contract.81 A similar distinction exists in the common law between reliance interest and expectation interest.82

Culpa in contr-ahendo generally will lead to a remedy for negativedamages.83

The obligation assumed by the signatories of a letter of intent is not toperform the contract that remains to be concluded. The obligationassumed is not even to reach an agreement, but to take all steps towardsthis end. Thus, it would appear difficult to punish the wrongful breach bycompensation calculated by reference to the profits lost on a contract to beconcluded. If the sanction must correspond to the obligation, a failure tonegotiate in good faith should rather be followed by the grant of negativedamages, seeking to return the partner to the situation that it would havebeen in if it had not entered into negotiations with the party responsiblefor the breach.84

so See R.B. Schlesinger, op. cit. I, p. 89 note 13.

81 On this distinction, see, e.g., K. Larenz, Allgemeinen Teil des deuJscltes Recltls, 7th edition, 1989, p. 388; see also J. Ghestin, Of). cil., No. 943. The distinction is also to be foundin Italian law in the application of Article 1337 of the Civil Code.

82 The distinction found its way in American law after the article of L.L. Fuller & W.Purdue, The Reliance Interest in Contract Damages, 46 Yale Law.J (1935), pp. 52-98.Nowadays, it is a favorite theme of discussion of the Law and Econmnics school (d. forinstance R. Cooter & Th. Vlen, Law and Economics, 2nd eel., 1996, pp. 172-180,203-211).

83 But certain texts would limit the negative damages to the amount (which can belower) of the positive damages. See J. Esser & E. Schmidt, Schuldrecht, Vol. 1/2, 7th edition, Heidelberg, Muller, 1993, p. 142.

81 Compare F. Kessler & E. Fine, op. cit., p. 405.


Such damages will essentially comprise the cost of the negotiations:time wasted, the costs of travel and sustenance, preliminary studies, etc.Negative damages can, however, also cover other elements, such as the possible harm to commercial reputation resulting from the circumstancesunder which the negotiation was broken off, the loss resulting from theimpossibility to perform an undertaking assumed in good faith towards athird party on the expectations reasonably inferred from the letter ofintent, or even the benefit lost from a transaction, which could have beenconcluded with a third party, if the aggrieved party had not believed it wasbound by the failed negotiation. Negative damages are not necessarily inferior to positive damages.

However, concerning some of the indirect losses that have just beendescribed, one cannot underestimate the very delicate character of evidential matters, due to the complexity and the uncertainty of the type ofnegotiations under discussion. The aggrieved party may experience muchdifficulty in proving that a similar contract could have been concluded witha third party. On the other hand, the victim's own imprudence may lead todiminish or even suppress any obligation to compensate, e.g., if inconsiderate commitments had made towards third parties at a premature stage ofthe negotiations.

Compensation due in case of wrongful breach of negotiations by thesignatory of a letter of intent where one can recognize a contract to negotiate should thus correspond to negative damages, subject to the abovereservations. It would only appear possible to envisage positive damages,compensation for the profit lost from the abortive contract negotiations atan extremely advanced stage of negotiations, in cases where one mightsometimes consider that the contract is already concluded and that ajudgemight complete the final secondary provisions (see above) .R!)

The distinction between positive and negative damages, enlighteningfor the present discussion, appears to be admissible even in the domesticsystems that have not yet adopted such distinction, such as French orBelgian law. In the common law, the similar distinction between relianceand expectation interests has been referred to. In Walford v. Miles, theHouse of Lords sentenced the author of the wrongful breach to compensate for the loss resulting from the direct costs of the failed negotiation.

85 A Swiss member of the Group was more open to the idea of an award of positivedamages, "when the fault committed is particularly characterized and mostly when itoccurred at a moment when the greater part of the essential elements of the contractwere already agreed upon." This position is facilitated, under Swiss law, by Article 43 ofthe Code of Obligations, which provides that "The judge determines means as well asextent of indemnification due, according to the circumstances and the seriousness ofthe fault."


Whatever the applicable law, particular aspects of the problem of damages arise where the fault consists of the breach of a specific obligationsuch as to respect the confidential character of information exchanged(Example 21). The damage suffered by a company whose business secretshave been disclosed to a third party should also be compensated subject tothe problems of proof as to the establishment of the amount of the loss. Onthe other hand, where one of the parties has been authorized to start thework (Example 26) the damages flowing from the wrongful breach of discussions by the other party should also bear in mind the injury arising fromthe wholly wasted efforts of these first phases of the abortive contract.86

One final remark about damages. The above discussion presupposesthat the wrongful breach of negotiations has led to legal action. Such a situation may be theoretical. A claim for damages, however legally justified,may be unthinkable from a commercial point of view, or because of theother party's standing. This observation is, of course, not specific to lettersof intent.

(d) Effect of letters of intent after the conclusion of the contract.

The negotiation, which was the occasion of issuing different letters ofintent, has come to a successful end: the definitive contract has been concluded. Do pre-contractual documents then lose all effect? This is notalways the case.

Firstly, the contract may later be avoided. One mainly thinks of a partyhaving made a mistake in contracting, which could have been caused by theother party failing to give adequate information. In such a case, a letter ofintent can provide a context permitting to determine whether or not the mistake was essential and in what measure damages should be granted.87 Theproblem has so far hardly been analyzed but it deserves attention. 88

Secondly, the letter of intent may be relevant in cases where the contract remains valid, but non-performance of a pre-contractual duty servesas a basis for an action in damages to compensate the aggrieved party. Onecan think of pre-contractual obligations of information, advice, fair dealingor confidentiality, the breach of which is generally not fundamental anddoes not lead to the avoidance of the contract.

S6 Cf. on this subject R.D. McGrew op. cit. p. 481.

87 M. Vanwijck-Alexandre, La reparation du dommage dans la negociation et la formation des contrats, Ann. Fac. Dr. loi~ge, 1980, pp. 61-71.

88 For a critical appraisal of the application of the concept of good faith in cases ofdefective consent, d. B. ]aluzot, La bonne foi dans les contrats, Etude comparative de dfVitfraru;ais, allemand et japonais, Paris, Dalloz, 2001, pp. 372-379.


One can also consider whether letters of intent may not serve as meansto interpret the contract. The contracts to negotiate, which may have beenconcluded, have, of course, exhausted their purpose. But could not lettersof intent, in case of subsequent disputes, help interpret the contract thatthey helped to prepare?

Some members of the Group thought they could discern, in thisrespect, a general contrast between French law, favorable to the consideration of pre-contractual documents for the purposes of interpretation89

and English law, depriving of any effect all that precedes the conclusion ofthe contract.90 Other members considered, however, that an Englishjudgewill not always remain indifferent to the interpretative value of a pre-contractual document.

The parties can consider this question in drafting their definitive contract, either by providing that earlier documents should be incorporated inthe contract91 or, by stipulating that the provisions of the definitive contractshall supersede and replace everything that went before.92

Finally, mention will be made of the possible role ofletters of intent ina context involving several consecutive or parallel contracts. Pre-contractual agreements may be preliminary not to a single final contract but to agroup of contracts. What is the situation if some of these contracts are concluded, but not some others? Letters of intent may here be invoked todemonstrate that the group was considered as an indivisible whole and thatseparate contracts cannot have any effect when there is no full agreement.A means exists to reduce the legal insecurity that could derive from this situation: it will be suggested in the following recommendations.

IV. ADVICE TO NEGOTIATORS

The study and discussion of the collection of 100 or so letters of intenthave permitted us to sketch some legal observations. Our meetings havealso brought to light a series of dangers to which the draftsmen of lettersof intent are not always attentive in practice, as well as a group of suggestions that may be helpful to improve the use of pre-contractual documents.

89 Cf. J. Ferraris, loe role des documents precontractuels dans l'interpretation par le juge ducontrat, Paris, Publibok Universite, 2003.

90 In support of this argument, see Ph. Kahn, op. cit. p. 187. Cf.in/ra, Chapter 3 concerning interpretation clauses, pp. 106-114.

91 Cf. Tmllof)e & Coll5 7). Atomic Power (1962) 3 All E.R. 1035.

92 Cf. infra, Chapter 3, pp. 132-145. Cf. also Ph. Kahn, op. cit. pp. 187-189; E.H.Hondius, De "entire agreement" clausule: Amerikaanse contractsbedingen in hetNederlandse recht, in Recht als norm en als aspiratie, Nijmegen, 1986, pp. 24-34.


1. Most of the letters of intent examined showed a number of seriousor minor drafting errors, such as would cause inevitable difficultiesof interpretation between the parties in the event of dispute. A typical illustration has been given (Example 12). A major reason forthis situation seems to be the fact that letters of intent are oftendrafted by non-lawyers, e.g., by engineers or by the sales department of the company. These persons, untrained in legal terminology, use expressions from current language lacking in precision,and even in certain cases, special terms which they have createdand of which they alone know the sometimes surprising nuances(some sales departments, for example, introduce subtle distinctions between agreement, contract, order, etc.). The ambiguitiesthus created can have disastrous consequences. The first, andessential, advice is that the legal department should always be present at the drafting of pre-contractual documents, or that it shouldat least provide the non-legal negotiators with precise instructionsabout the expressions to be used or avoided.

2. The ambiguity of some letters of intent flows from another cause.The draftsmen seek to get a document accepted that binds themas little as possible while binding their partner. Such a purposenecessarily leads to equivocal texts. The group considers that thereis little to be gained from such a play, which furthermore incursthe risk of creating many unfortunate side effects by the inherentuncertainties. It is always preferable to express, as clearly as possible, what is to be binding and what is not.

3. If one wishes not to be bound, while intending nevertheless toestablish some document recording the progress of negotiations,it is preferable to say so, either by use of an expression such as theEnglish phrase "subject to contract" (Example 14), always bearingin mind the doubts as to its effects under some other legal systems,or by excluding the imposition of damages in the event of breach(Examples 16 and 17). But one should not forget that even in theabsence of any legal obligation, a letter of intent involves the reputation of the firm, and that the non-legal consequences of adenial can be just as serious as the legal consequences avoided(damage to commercial credit, breaking down of business relationships, etc.).

4. If one expects the letter of intent to give rise to certain obligations,it is better to express precisely the purpose of those obligations:not questioning again, without good cause, the results alreadyachieved, not entering into parallel negotiations with third partiesso long as the negotiations between the parties continue. It is alsovery desirable to specify the consequences of potential breaches,in particular the quantification of damages. The negotiators canalso provide for the appointment of an arbitrator to settle certain


incidental clauses of the contract in the event of differences between the parties.

5. An interesting suggestion made by one member of the Groupwould be to stipulate at the start of the negotiations that the various pre-contractual documents will not be binding unless and tothe extent that this should be expressly stated.

6. A number of the documents examined illustrated the importanceof a set procedure for the negotiations, in particular so far as concerns fixing time periods for various phases. A clause covering theconfidentiality of information exchanged seems necessary in certain cases.

7. The definitive contract ought to contain a clause relating to the letters of intent and other documents that have preceded it, either toestablish their value for interpretation or to deprive them from thestart of any legal effect.

8. If negotiations lead not to a single contract but to a group of contracts, the risk exists that after the conclusion of some of these contracts, completion of some others would not succeed. Letters ofintent should be drafted in a way that would prevent one partnerfrom claiming that the concluded contracts had already enter intoforce. A safer technique consists in creating a relay between the letters of intent and the different final contracts: a frame contractenumerating the different contracts to be concluded and expressing their necessary interdependence.93

9. Finally, the problem of which law should apply should not beignored by the negotiators, for the legal effect of the various stagesin the conclusion of the contract is not precisely the same fromone country to another.

V. CONCLUSION

The collection and discussion of a substantial file of pre-contractual documents allowed the Working Group to appreciate the importance and variety of the phenomenon of letters of intent and other pre-contractualdocuments. The wealth of information, which was procured during theresearch project, had not been revealed by the traditional studies on the formation of contracts. Legal theory on negotiations has made substantialprogress during the last century, but the material brought together here suggests that much remains to be done. Where the negotiations are long anddifficult, the development of the future contract is itself often anticipated bythe conclusion of a series of prior contracts, which record progressively theresults achieved, or which organize the various aspects of the negotiations.

93 Cf. supra, the footnote under Example 12, another application of the frame-contract technique.


The study of such contracts gives rise to thorny problems, e.g., theextent of the obligations assumed, the establishment of breach or the fixing of damages.

The legal observations set forth above is a first attempt, which should becarried further on the basis of more substantial comparative law research.

CHAPTER 2

RECITALS IN INTERNATIONAL CONTRACTS

I. INTRODUCTION

A large number of contracts, particularly those dealing with international trade, begin with so-called "recitals." The parties to such contractsuse recitals to set out a series of statements that they regard as useful beforeapproaching the body of the contract. Often, the parties introduce themselves and state their respective qualifications. They describe the purposesof their contract and the circumstances that have brought about their collaboration. The history of their negotiations is sometimes given. Recitalsrecord a wide variety of statements and acknowledgements. A transitionalformula then leads to the contract itself.

Here is a first example:

"M. is specialised in international Project Managership and contracting in the Turnkey Engineering field and wishes to furtherexpand its activities by means of association with P. to enable bothCompanies to benefit from the possible introduction of the ...Filter to the ... Mining and Metallurgical Industries.

"With this purpose in mind, M. has approached P.

"The P. Group is active in the international engineering designand contracting industry, particularly those concerning plants of aMetallurgical nature and incorporating applications of theFilter.

"Therefore, it would appear that the above-mentioned Groupshave a common interest of forming a joint venture in order to promote the P. Filter application in ...

"Therefore, the following has been agreed upon: ..."

Although recitals occur widely, their legal implications appear to havebeen given little attention until now.!

1 Subject to what will be said infra, p. 86 regarding English law, another extensivestudy can be referred to: F.W. Grosheide, De considerans in internationale commercieJecontracten, in Molengrafica, Henvorrning en vcrgelijkend privaatrecht, Lelystad, Vermande,1991, pp. 295-324. There are however some references to recitals in certain works for

59


The classical theory of contracts says nothing whatever about recitals.Should this silence be taken to mean that recitals have no legal implications? This would indeed be surprising if one bears in mind the growthsince the 19th century in legal literature on the legal status of contractnegotiations and the various legal effects that have come to be attributedto them. In the preceding chapter, a variety of situations giving rise to legalimplications was discovered concerning letters of intent.2 In the case ofrecitals, one reaches the threshold of the contract. There has been a meeting of minds and it is in the very document, which records their agreement, that the parties feel the need to describe some of the circumstancessurrounding that agreement. It would be paradoxical if recitals were to bewithout any legal implications when such implications are recognized incertain aspects of the pre-contractual negotiations.

The study of recitals is made difficult by its novelty. We begin with adescription of how recitals occur in practice. The analysis is based on some200 examples of recitals collected by the Working Group (Section II). Thesecond part of the study attempts to put forward some suggestions on thelegal implications of recitals; after drawing parallels with similar but better known legal concepts, we point out the different ways in which the contents of recitals appear capable of affecting the legal position of the partiesto the contract (Section III). Finally, we offer some advice to negotiators(Section IV).

II. RECITALS IN PRACTICE

A. Frequency of Occurrence

Recitals exist in a considerable number of contracts. An inventorymade by a member of the Group of a representative sample of his firm'scontracts showed the occurrence of recitals in 85 percent of cases! Recitalsare not specific to international contracts,3 but they have undergone considerable development in this area. Recitals introduce contracts of all types:sale and purchase, distribution, franchise, leases, agency, loan, pledge,transfer of technology, industrial construction, joint ventures, settlement

practitioners, e.g., inJ.M. Deleuze, foe contrat international de licence de know-how, Paris, 4thed., 1988, No. 60; J.A. Boon & R. Goffin, Les r:onlrals "de en main, "Paris, Masson, 1981,No. 37; D. Ledouble, L'enlrefJrise el le amlral, Paris, Litec, 1980, No. 105; D. Blanco,Negocier et rediger un contratinternational, Paris, Dunod, 1993, p. 98; J.M. Mousseron,Technique contractuelle, 2nd ed., Paris, Francis Lefebvre, 1999, pp. 171-173.

2 Cf. sUfJra, pp. 5-30.

3 Insertion of recitals is characteristic in legal documents with a certain degree ofsolemnity, such as notarized documents (P. Watelet, foa redaction des actes notaries, Brussels,Larcier, 1975, p. 58)) or deeds (Odgers, Construction oj Deeds and Statutes, 5th ed, 1967,pp. 149-160).

Recitals In International Contracts • 61

agreements, etc. Recitals are particularly frequent in contracts where theparties feel the need to give some explanation, notably because the precontractual negotiations have been long and difficult or because the contract relates to an original and complex transaction, especially if thetransaction is to be implemented over a certain length of time.

The frequent occurrence of recitals explains why practical guides tocontract drafting refer to them. Thus, the U.N. Economic Commissionfor Europe's Guide on the Transfer of Know-How states that recitals canserve as an aid to interpreting the parties' obligations in the event of adispute.4 The WIPO Guide describes the practice of including recitals,their significance and content in agreements for the licensing or transferof technology.5 UNCITRAL's Guides on International Contracts forConstruction of Industrial Works and on International CountertradeTransactions state that recitals can contain certain statements instrumental to entering into the contract, defining the purpose of the contractand the context of its conclusion. G

On the other hand, it is noteworthy that standard contracts publishedby the International Chamber of Commerce7 and the standard contract onInternational Sales of Perishable Goods prepared by the InternationalTrade CentreS do not include recitals, while the new FIDIC contracts9 have

1 U.N. Economic Commission for Europe, Guide for [he in Drawing lIt) ContradsRelating to the International Transfer qfKnow-IIow in the Engineering IruJustry, 1970, No. 24;J.M. Deleuze, op. cit., No. 60.

5 vVIPO, /jcencing OuideJorDeveloping Countries, 1977, No. 124-127.

6 UNCITRAL, Legal Guide on Drawing lIt) International Contnu;tsfor Construdion (~f

Industrial Wmks, New York, 1988, p. 49; UNCITRAL, Legal Guide on InternationalCountertrade Transactions, 1993, p. 47.

Although entitled "Preamble," Article 1 of the general conditions issued by the U.N.Economic Commission for Europe, appears to be of a different nature. Article 1 formspart of the body of the contract and provides that the conditions are to apply unless bothparties expreSSly agree otherwise in writing. (See notably conditions 188A).

7 ICC Model Commercial Agency Contract, ICC Publication No. 496, Paris, ICCPublishing, 1991; ICC Model Distributorship Contract, ICC Publication No. 518, Paris,ICC Publishing, 1993; ICC Model International Sale Contract (Manufactured Goodsintended for resale), ICC Publication No. 556, Paris, ICC Publishing, 1997; ICC ModelOccasional Intermediary Contract, ICC Publication No. 619, Paris, ICC Publishing, 2000;ICC Model International Franchising Contract, ICC Publication No. 557, Paris, ICCPublishing, 2000.

S Model Contract and Users' Guide, International Commercial Sale of PerishableGoods, International Trade Centre (UNCTAD/vVTO) 1999, 78 pp.

9 Conditions of Contract for Construction (new Red Book), Lausanne, FIDIC, 1999;Conditions of Contract for Plant and Design-Build (new Orange/Yellow Book),Lausanne, FIDIC, 1999; Conditions of Contract for EPC Turnkey Projects (Silver Book),


only very short ones. This can be explained by the nature of these contracts, which aim at standardization, whereas recitals hardly fit such a purpose. The lack of mention of the possibility of drafting recitals can also beexplained by the fact that some standard contracts are meant to be used inspecific sectors such as commodities, perishable goods or products manufactured for sale, where contracts are not subject to lengthy negotiations.

B. Form

Recitals occur most often after a commencement introducing the parties to the contract:

"This agreement is made between Consolidated Industries, Inc.,hereinafter called Licensor, a corporation organized under the lawsof Delaware, United States of America (United States), and havingits principal offices in the United States, and Gas N.V., hereinaftercalled Licensee, a naamloze vennootschap organized and existingunder the laws of the Kingdom of the Netherlands (Netherlands)and having its residence and principal offices in the Netherlands.

"Witnesseth:

"Whereas, ..."

Sometimes, recitals bear a title: (Preamble, Expose des Motifs, Preliminary,Recitals, Praambel, Premesse, etc). In contracts drafted in English, the recitalsare often introduced by the word Witnesseth, as in the above example.

Generally, each paragraph of recitals begins with the words VVhereas, orin French Attendu que or Considerant que.

Often, recitals end with wording that leads into the beginning of thecontract. Here are some typical examples:

• "now, therefore in consideration of the premises and of the mutualagreements hereinafter contained, Licensor and Licensee dohereby agree as follows: ..."

• "now, therefore, it is hereby agreed as follows: "• "en foi de quoi, il a ete convenu de ce qui suit: "

Lausanne, FIDIC, 1999. The standard form, which incorporates FIDIC conditions intothe contract, starts with the following recitals: "vVhereas the Employer desires that theWorks known as ... should be executed by the Contractor, and has accepted a Tenderby the Contractor for the execution and completion of these Works and the remedyingof any defects therein."


C. Length

The length of recitals varies considerably, from a few lines to severalpages. Here is an example of a particularly brief recital:

"Whereas, pursuant to arrangements made by X incorporated andBank of Z Limited (hereincalled the Managers), the Banks, subjectto the terms and conditions herein set forth, are willing to makeloans available to the Borrower in a maximum aggregate principalamount of U.S. $ ...

"Now, Therefore, it is agreed: ..."

Such brevity is fairly exceptional. Most recitals vary in length depending on the complexity of the circumstances surrounding the contract, andalso on the verbosity of the contract's draftsmen and their desire to set outsome explanations before entering into the contract.

D. Contents

What do recitals contain? Although their contents vary considerably, itis possible to categorize the types of subject matter most frequently encountered. The following account simply describes those different types; legalissues will merely be identified and will be discussed later in the secondpart of this study.Io

1. Attributes of the Parties

Although the parties to the contract will perhaps have already beenidentified in the commencement of the contract, recitals very often contain a more detailed description of their respective skills and attributes:

• "whereas, A, through the operation of its subsidiaries and affiliateslocated in 22 countries in the world, has accumulated and is accumulating valuable experience and know-how in the business of,among other things, renting various kinds of television, video taperecorders and other similar and related merchandises to individuals, hotels and other customers;"

• "whereas, Band C each possess valuable information regarding themarket situation relating to television, videotape recorders andsimilar and related merchandises and the rental business relatedthereto: ..."

• "whereas, A is in the business of selling food products to end consumers in ... and wishes to establish facilities for the production

10 See infra, pp. 87-100.


and bottling and/or canning of fruit and similar drinks (hereinafter referred to as the Facilities);"

• "B is in the business of manufacturing and selling fruit juices, softdrinks, fruit concentrates and syrups in Europe and in other countries but is not in a position to market its finished products inArabian countries;"

• "C is in the business in the Middle East and Mrica of developingand managing complete industrial projects including the provisionof technical and general management assistance to such projectsand wishes to cooperate closely with above mentioned partnerswith respect to the construction of, and the transfer of technologyto, the Facilities; ..."

Often there is distinct emphasis of the particular attributes of one orthe other of the parties:

• "whereas, Licensor is now and it and its predecessors for manyyears have been engaged in the business of designing, manufacturing and selling office plate holding devices, ... ;"

• "Licensee is among the world leaders in the business of licensingknow-how and patent rights for the design, construction and operation of ... plants ... ;"

• "considerant que X possede une experience tres developpeedans la fabrication mecanique et dans la commercialisation d'articles de ... ;"

• "A, constructeur de materiel textile, d'une part possede un reseaucommercial important dans Ie monde entier et est donc, de ce fait,bien place pour recueillir des demandes d'installations de fils oufibres chimiques, ..."

Such flattering appreciation is not always without ulterior motive. Inmany instances, it is initiated by the other party and doubtless the party thatis the object of the flattery is unable to refuse the compliment. Below weshall deal with the repercussions that flattering words in the recitals canhave on the parties' level of liability under the contract. l1

In some cases, the opposite occurs and it is the party that is the objectof the eulogy who requires its inclusion so as to justifY any harsh provisionsthat it has forced the other party to accept. Such is the case in a FranchiseAgreement containing the following:

"Considerant que X possede une posItIOn preponderante enmatiere de creation de chaussures de femmes et dispose d'importants moyens de production, ...



"Considerant que X a cree, en France et al'etranger, des magasinsde qualite indiscutable, installes dans des quartiers prestigieux etdont l' existence favorise Ie renom de ses propres marques, ainsique de celles commercialisees dans ces points de vente,

"Considerant que Ie franchise est conscient des avantages que peutlui procurer une plus etroite collaboration avec X, ..."

Conversely, a party to a contract may wish to emphasize its own limitations so as to highlight the other party's responsibilities.

"Considerant que la societe X n'est pas initiee ala technique informatique,"

2. The Parties' Objectives in Entering Into the Contract

Another topic frequently dealt with in recitals is the objectives soughtby the parties at the time of entering into the contract. Here are severalexamples:

• "whereas, the Parties are desirous of participating in the executionof the Project, and, accordingly, wish to jointly prepare and submitto the Customer a Tender for the Project, and thereafter, if theTender is accepted by the Customer, to execute the Project in collaborationjointly and severally towards the Customer, ..."

• "whereas A and B desire to rationalize the production and operation of their respective mills so as to permit each mill to concentrateits production on grades of paper best suited to its equipment, toobviate short runs, and to effectuate other economies in the operations of both companies; ..."

• "Attendu que les objectifs essentiels vises par cette collaboration sont:la mise au point et l'adaptation en commun de materiel textilemettant en ~uvre la technologie la plus recente et la plusperformante;la coordination des moyens de recherches de chaque Partie, afind'abaisser Ie cofH de ces recherches et d'en augmenter l'efficacite;de faire beneficier B de l'experience industrielle d'un producteurmondial de fils et/ou fibres chimiques;de developper une industrie franc;aise de la construction demateriel pour la fabrication et la transformation de fils et/ou fibreschimiques;"

• "Considerant que X desire participer au developpement de cettenouvelle industrie pour mieux mettre en valeur sa main-d'~uvre,

ses propres investissements et son know-how en matiere de ... ;qu'elle desire egalement renforcer sa participation dans cette


industrie au cas 011 il s'avererait, a la suite de l'experimentation,qu'une telle extension de sa participation serait souhaitable; quecette participation permettrait a x d'utiliser pleinement lesactifs dont elle dispose actuellement, etendrait ses activites dansun secteur nouveau de l'industrie du ... et contribuerait ainsi apreserver sa position dans cette industrie en s'adaptant a sonevolution; ..."

The technique of setting the contract in its context can be used to satisfY a desire to provide an aid to interpretation for use in the event of anyfuture disagreement between the parties.

In the following extract from the recitals to ajoint venture agreement,the parties describe the fundamental reasons for their alliance:

"I'organisation de cette entite reposerait sur l'idee fondamentalequ'elle constitue un moyen au service des parties destine afaciliterla coordination de leurs efforts et de la mise en oeuvre de leursmoyens respectifs et aameliorer les resultats de leur cooperationen vue de realiser les objectifs susvises."

Descriptions of the parties' objectives are sometimes given ajournalistic ring, as in the recitals to this franchise agreement:

"Les difficultes dont souffre Ie commerce independant en general,y compris celui de la quincaillerie, proviennent d'un certain nombre de causes dont les principales sont les suivantes:

"les consommateurs ont de plus en plus tendance aestimer tropeleve Ie prix des marchandises qui leur sont offertes;

"l'accroissement continu des charges d'exploitation rend de plusen plus difficile l'equilibre des entreprises;

"une concurrence croissante disposant d'un pouvoir d'achatimportant et de puissant moyens d'action, utilisant les techniquesles plus modernes de distribution, attire aelle une part croissantedu marche au detriment du commerce isole.

"Afin de reprendre leur place et de retrouver une pleine activite,les commen;ants independants n'ont d'autre moyen que d'unirleurs efforts en se groupant pour mettre en commun leur capacited'achat et d'acceder ainsi aux methodes commerciales modernesqui font Ie succes de leurs concurrents."


No doubt this is inspired by the desire to sell the franchise agreementto the franchisee and perhaps also to provide future justification for thecontract under competition law by stressing the aim of rationalization.

In some contracts with developing countries, the recitals serve to set thecontract within the regulation of foreign investment12 and the economic policy objectives pursued by the government of the country in question:

"que X est chargee, sous sa responsabilite, de promouvoir l'industrialisation (du pays Z) dans Ie domaine de la construction mecanique;

"que X a plus particulierement pour mission la creation d'uneindustrie autonome et independante susceptible de repondre auxbesoins actuels et futurs (du pays Z) en matiere de constructionsmecaniques et, notamment, dans Ie domaine de la fabrication etde la distribution de cycles, de cyclomoteurs et de moteurs ...

"que Ie Constructeur accepte la mission qui lui est confiee dans Iecadre des principes definis par (Ie pays Z) dans Ie but de developper son economie nationale."

Some recitals refer to the New International Economic Order13

"attendu que X et Y, conscients de contribuer ainsi a l'edificationd'un nouvel ordre economique international, ont decide de conclure la presente Convention Generale de Cooperation, pouretablir entre elles une cooperation institutionalisee et pour fixerles principes et Ie cadre de cette cooperation."

Below we shall describe the possible consequences that such a reference may have on the parties' obligations under the contract. 14

3. The Spirit in Which the Parties Have Entered Into the Contract

When an agreement raises sensitive issues for its signatories, for example, with regard to their relations with their principals, recitals can serve asan opportunity to state the spirit in which each party is entering into theagreement. Take as an example this extract from an agreement enteredinto in 1964 in Belgium between the public administration, trade unions

12 See, for instance, the recitals of the contract leading to the Pyramids arbitrations(ICSID decision, November 27,1985, XVI Yearb. Corn. Arb. 1991, 16).

13 About the New International Economic Order, see infra, p. 93.

11 See infra, p. 93.


and parties from the private sector. The agreement relates to the organization of the production and distribution of gas and electricity:

"Les organisations signataires, tout en ne se considerant pas commeengagees de fac;on generale sur Ie plan des principes applicablesen matiere economique et sociale, indiquent ci-apres dans quelesprit elles signent la Convention:

"Les organisations syndicales des travailleurs et la FIB, considerant,d'une part, les resultats obtenus par la formule de contrOle deI'electricite derivant de la Convention de 1955 mais, d'autre part,la limitation du champ d'activite de celle-ci aux producteurs-distributeurs prives, se rejouissent de voir aboutir les efforts tendanta incorporer dans la Convention de controle l'ensemble dusecteur de l'electricite. Par ailleurs, etant donne les activites mixtes(eIectricite et gaz) exercees par certaines societes, et l'aspect d'utilite publique de l'approvisionnement en gaz, elles se rejouissentegalement de l'adhesion a la Convention de la partie privee de cesecteur et esperent pouvoir etendre cette adhesion a l' ensemblede celui-ci.

"Ces organisations ont entendu egalement orienter vers une actionde prevision et de programme la mission du Comite de Controleet donner a son secretariat les moyens voulus pour la remplir.

"Les entreprises privees d'electricite, fortes de l'experienceacquise, se rallient a une consolidation de la formule de controle.Les entreprises publiques d'electricite et les unions de centralesindustrielles, considerant qu'elles ne peuvent rester en dehorsd'un mouvement de coordination de la politique de l'eIectricite,decident d'adherer a la Convention dans les limites indiqueesrespectivement dans les statuts de la SGSPE et dans la conventionavec Ie Comite de gestion des entreprises d'eIectricite.

"Les entreprises privees gazieres, enfin, se montrent disposees as'engager dans un systeme de controle qui a fait ses preuves enelectricite.

"De son cote, Ie Gouvernement, conscient de sa responsabilite enmatiere de politique energetique et considerant que la nouvelleconvention de I'electricite et du gaz a Ie merite d'etendre un systeme qui,jusqu'a present, a donne d'heureux resultats, approuvecette convention et y apporte sa collaboration. II a entendu ydefinir son role et ses prerogatives.


"Toutes les parties constituantes et Ie Gouvernement se rallient auxobjectifs de la Convention, soit, dans l'interet general, poursuivre larationalisation des secteurs et la realisation d'une gestion plus coordonnee et plus unifiee pour arriver aun abaissement des prix de l'eIectricite et du gaz, en tenant compte de la situation economique et ducaractere de service d'utilite publique des secteurs."

4. Circumstances Preceding and Surrounding the Contract

Recitals are often the place where parties recount the circumstanceswhich have preceded and which surround the entering into the contract.

Here are two examples of this:

• "The Giotto project is undertaken to achieve an exploratory missionto the Comet Halley, Giotto is to be launched by an Ariane lauchnerin a tight single launch window in July 1985. The encounter withHalley is to take place in March 1986. The principal objectives of theGiotto experiments include imaging the nucleus of the CometHalley and chemical analysis of the Coma during a fast fly-by. TheGiotto project principally consist of three parts:"the Giotto Spacecraft (hereinafter referred to as Giotto) and"the Giotto Experiment Payload (hereinafter referred to as theExperiments) and"the Giotto ground segment...."

• "11 a ete prealablement expose:"1. Qu'apres la decouverte, au ... , d'un gisement de calcaire, Xa fait proceder aune etude sur la rentabilite de l'investissementnecessaire a la construction et a l'exploitation d'une cimenterieinstallee aproximite dudit gisement;"2. Qu'apres examen de cette etude de rentabilite, X a decide deconstruire aproximite du gisement decouvert une cimenterie dedeux lignes de production capable de produire annuellement unmillion deux cent mille tonnes de clinker, ladite cimenterie devants'approvisionner aux carrieres d'exploitation dudit gisement, la production de clinker devant etre en partie utilisee au ... et en partieexportee, notanunent en ..."

The description of the contractual context can include commercial,political, technical and other elements affecting the contract, as well as theallocation of risks decided by the parties. In the financial sector, the recitalsmay refer to the transactions that are the subject matter of the operation,such as buyers' credits, which identify and describe in detail the commercial contract that is being financed.!5

15 G. Bourdeaux, Le credit acheteuT international, Paris, Economica, 1995, pp. 149-150.


Such descriptions of the environment in which the contract has beenentered into appear capable of affecting the future interpretation of thecontract. lG Could they not also facilitate the adaptation or the terminationof the contract if the circumstances described in the recitals proved different from reality or if they changed drastically?17

Describing the circumstances that led to the making of the contractseems particularly important in the case of settlement agreements giventhat the recitals will outline the dispute that the settlement is intended tobring to an end:

"en date du 12.12.1977, X a passe commande aY d'un remorqueurbaptise ulterieurement Dans Ie cadre de cette commande, Y apasse differents contrats pour la fourniture de deux moteursde propulsion entrainant chacun une pompe aincendie, sans qu'ilsoit utile ici d'entrer dans Ie detail de ces contrats ou des responsabilites en decoulant. Posterieurement ala livraison du navire, lesgroupes propulseurs pompes a incendie furent l'objet de gravesdeteriorations qui necessiterent des travaux et depenses importantes dont Ie montant s'est eleve apres de 650.000 francs.

"Les parties au present protocole n'ayant pu se mettre d'accord surles causes et responsabilites des desordres constates, une expertiseamiable fut confiee aM. W par un accord en date du 25 avril 1983.

"M. W ayant depose son rapport Ie 13 janvier 1984, les parties sesont alors rapprochees pour trouver une solution amiable a leurdifferend.

"C'est dans ces conditions qu'il a ete convenu ce qui suit ..."

The need to describe the circumstances in which the contract has beenconcluded also appears when the purpose of the contract is to amend apre-existing contract. Here, the parties feel the need to explain the amendments and to set them in context:

"whereas, Primo and Secundo have entered into a ... 'ProductsAgreement' as of the first day ofJanuary 1980 (hereinafter referredto as 'The Agreement');

"whereas, it has now become apparent to Primo and Secundo thatParagraph 4.03 of The Agreement does not adequatly protectSecundo's interest, and




"whereas, in the furtherance of a good business relationship,Primo desires that Secundo's interests be adequately protected;

"now, therefore, in consideration of the premises and the mutualconvenants herein set forth, it is agreed that the first sentence ofParagraph 4.03 of the Agreement shall be amended to read asfollows: ..."

5. Links With Other Contracts

Contracts sometimes have links with other contracts. In such cases,recitals frequently make reference to this fact:

• "whereas Buyer has previously purchased from Seller one Proof-ofConcept Widget under a Purchase Order, dated as amended;"whereas Buyer and Seller have previously entered into a WidgetSales agreement (hereinafter 'Sales Agreement'), dated ... ;"whereas Buyer and Seller have previously entered into a Licenseand Technical Assistance Agreement (hereinafter 'LTAA'), dated .. . , concerning the Widget;"whereas Buyer and Seller desire to continue their cooperative effortsto develop, manufacture, market, and sell the Widget; ..."

• "II a prealablement ete expose que:"1) Le 'Ministry of Works' de la Republique de ... (ci-apn~~s

denomme Ie 'Client') a conclu avec l'E.G., Ie ... mil neuf centquatre vingt deux, un contrat relatif aux etudes, genie civil, fournitures, montage et toutes operations de mise en service d'un complexe ... aeriger sur Ie site de ... que Ie Sous-Traitant a visiteanterieurement aux presentes. Travaux ci-apres designes comme:Ie 'Main Contract' (ou Ie 'Contrat Principal') ou 'l'Entreprise.'"2) De son cote, al'issue des negociations de ... auxquelles ... a participe activement et apres avoir pris connaissance du 'MainContract,' Ie Sous-Traitant declare ...

The following example is the recitals to a contract entered into by thesupplier of an industrial plant who was required to accept part payment inthe form of crude oil, with a third party agreeing to repurchase the crudeoil against payment of a commission: 18

"Engineering C negocie avec la State Chemical Company (S.C.C.)un contrat industriel pour la fourniture d'unites de traitementfaisant partie du projet d'aromatiques d' ...

18 For a more detailed account of such a scenario see M. Fontaine, Aspectsjuridiques des contrats de compensation, D.PC!., 1981, pp. 203-213.


"Dans Ie cadre de ce projet, Engineering C ou l'acheteur qu'il auradesigne sera amene a garantir a la State Petroleum Company(SPC) Ie debouche aux prix et conditions officielles de la SPC de4 000 000 Tonnes de Brut dont 70% sous forme de grade lourd31-31.09 API et 30% sous forme de grade 1 Leger 34-34.09 APr."

References to linked contracts undoubtedly shed light on the significance of the contract in which they are contained. Sometimes it may bearguable that such references bring about some degree of legal linkagebetween the various contracts. 19

Linkage of this sort is undeniable in the following extract, also takenfrom a sub-contract:

"In view of this, A shall design, manufacture, deliver CIF, guarantee and generally assure the obligations described in the MainContract Documents on his equipment in the same manner as adirect Contractor towards Electric Company, as well as assure theerection, supervision and commissioning test on site, if required.A will be bound by all and any decision taken by E.C. and in particular: modifications, suspension or termination of the MainContract. ..."

The following example relates to a transfer of shares and makes theperformance of a concurrent contract a condition precedent to the entryinto force of the contract which contains these recitals:

"Considerant qu'un Accord d'Achat (ci-apn~~s denomme 'Accordd'Achat') date du 30 juillet 1970 est souscrit simultanement avecIe present par et entre A, C et B pour formuler les modalites suivant lesquelles A devra acheter, ou avoir achete ala Date de Cloture(ci-apres denommee "Cloture") tels qu'ils sont definis dans leditAccord d'Achat, les actions, prets et avances ci-dessus mentionnes,

"Considerant que les parties signataires souhaitent exposer dans Iepresent accord general leur accord en ce qui concerne les interetsrespectifs qu'elles vont avoir dans Ie capital de X et dans les pretset avances aelles consentis, ainsi que les prix a payer par chacuned'elles pour ce faire, en ce qui concerne la maniere dont X seraorganisee, contrOlee, dirigee et geree, d'un commun accord entreelles, aussi bien qu'en ce qui concerne les autres sl~ets dont question ci-dessous, dans Ie cas OU les transactions prevues dansl'Accord d'Achat sont effectivement realisees ala Cloture ..."



6. Stages of the Negotiations Leading Up to the Contract

Often, recitals serve as an opportunity to set out a chronological accountof the different stages of negotiations which have led to the making of thecontract. Here is an example of this:

1. "Attendu que l'Agence a envoye Ie 05 Octobre 1982 au Contractant une demande de revision de son offre de Novembre 1979pour la realisation d'une serie de satellites Meteosat pour un systE~me meteorologique operationnel (Ref.: Demande d'offre n°RFQl3-3425/82/F, sous couvert de la lettre n° ON/2703-82/CG/fd datee du 5 Octobre 1982)."

2. "Attendu que Ie Contractant a repondu acette demande d'offrerevisee, par sa proposition de Novembre 1982 et par les amendements qui y ont ete apportesjusqu'en 1983."

3. "Attendu que l'Agence a etabli et signe Ie 24juin 1983 une lettre(Ref.: ON/2794-83/CG:fd) de notification de son intention deconclure un contrat pour les travaux precites (3 satellites plus unjeu pre-assemble d'eIements de rechange) et d'autorisationformelle d'entreprendre immediatement les travaux."

4. "Attendu que Ie Contractant a formellement accepte tous les termesde cette lettre, en apposant sa contresignature Ie 18 juillet 1983."

5. "Attendu qu'une seconde lettre (Ref.: ON/2844-83/CG/fd dateedu 27 Decembre 1983) a ete signee par les deux Parties, les 5 et 11Janvier 1984, pour prolonger jusqu'au ler Avril 19841'autorisationformelle d'entreprendre les travaux et pour etablir ou amendercertains termes du contrat en preparation."

6. "Attendu que ces lettres ont prevu la conclusion d'un contrat dansun delai specifie, l' entree en vigueur de ce contrat avec effetretroactif au 21 Juin 1983, et l'annulation consecutive du caracterecontractuel des dites lettres."

7. "Attendu que les deux Parties ont acheve la negociation des termeset conditions necessaires a l'etablissement d'un contrat complet."

8. "Le lien contractuel entre l'Agence et Ie Contractant est apresentetabli et defini par Ie present contrat que les Parties substituentaux lettres precitees."

A factual account such as the above can obviously have a different ending, such as in the following example:

"en ce qui concerne toute matiere qui ne serait pas specifiquementtraitee dans Ie present contrat, les deux Parties conviennent de sereferer en priorite aux autorisations preIiminaires d'entreprendreles travaux (en cas de conflit, la plus recente devant prevaloir), etaux lettres de l'Organisation confirmant au Contractant lesaccords conclus sur les prix negocies et definitivement approuves;en cas de lacune, les deux Parties conviennent de se referer sub-


sidiairement aux termes de l'Appel d'Offres n° ... revise enjuillet1973, emanant de l'Organisation, ainsi que de la propositionsoumise par Ie Contractant Ie 16 aout 1973 et revisee par celui-ciIe 1er octobre 1973 ainsi qu'a l'occasion de la revue critique deconception tenue du 27 au 31 mai 1974 (les termes de l'Appeld'Offres devant prevaloir sur ceux des documents emanant duContractant, et en cas de conflit entre les documents precitesemanant du Contractant, Ie document Ie plus recent faisant foi)."

Such an account of the different stages of contract negotiations can, atthe very least, have an effect on how pre-contractual documents can beused to interpret the contract. 20

7. Acknowledgements and Statements by the Parties

Immediately prior to the making of a contract, it is not infrequent forone of the parties to require the other party to acknowledge certain factsthat may have some bearing on how the contract is to be performed. Thisis done to ensure that such facts were fully acknowledged at the time thecontract was entered into and thus to avoid any subsequent dispute in relation to them.

• "Whereas previously to the execution of the ... , Contractor hassatisfied himself as to the nature of the site of the Works, and thephysical conditions there prevailing, in so far as they affect theWorks or the execution thereof and has also satisfied himself as towhere and in what manner the labour, materials, and equipmentrequired for the Works can be obtained and has made everyallowance he considers desirable in his own judgement in view ofhis own information, for all and such matters in the ScheduledRates and Prices."

• "Afin de permettre a B de contracter en connaissance de cause, Aa communique a cette derniere la totalite des documents en sapossession relatifs aux Brevets Licencies et en particulier Ie resultat des recherches d'anteriorite."

Particularly noteworthy is the reference in the following example tothe existence of pending litigation:

"Whereas, Primo has agreed to grant to Tertio and Tertio hasagreed to accept from Primo, although aware of the pendency oflitigation concerning the validity and enforceability of the aforesaid patent, a non-exclusive license under United States patentNo.... , all on the terms and conditions hereinafter set forth."



In other instances, one or both of the parties acknowledge circumstances which will affect the performance of the contract:

• "X has represented that he is presently qualified to act in theabovementioned capacities in the Kingdom of Saudi Arabia andthat he will forthwith satisfy all requirements (including as tonationality) to remain so qualified for indefinite future."

• "Whereas, A has the financial ability, technical competence andprofessional skills necessary to carry out the Petroleum OperationsHereinafter described, ..."

• "Considerant que ni A ni Ie franchise n'ont, ace jour, signe un quelconque accord qui serait incompatible avec Ie present contrat, ..."

Often, recitals contain statements with reference to intellectual property rights:

• "Whereas, R is the owner of patents and patent applications, andmay be the owner of further patents and patent applications, inthe United States and Canada relating to the manufacture and useof Products (as hereinafter defined) and other spunbonded fabrics; and ..."

• "1. K has acquired a license under the French Patent ApplicationPV No.... registered on ... in the joint names of Centre Nationalde la Recherche Scientifique and Centre National de TransfusionSanguine (hereinafter referred to as C.N.R.S. and C.N.T.S.),entitled ... and its additional Application PV No.... registeredon ... , in the joint names of C.N.R.S. and C.N.T.S.

• "2. Said license is an exclusive manufacturing license for the wholeworld, an exclusive sales license for the whole world and a licensepermitting sub-licensing for the manufacture and sale in the wholeworld, of equipment conceived under the patent and the additionnal Application mentioned hereinabove in the first Whereas.

• "3. Applications corresponding to the above have also been filedin the United States of America, on ... and in Canada, on ...under Ser. No.... and ... respectively."

In all of these different examples, it seems that the underlying objective is either to avoid any subsequent dispute based on alleged ignoranceof the circumstances described in the recitals or to provide a basis for litigation or enforcement in the event that one of the acknowledgementsproves to be inaccurate or is not adhered to. 2\



8. Statement of Parties' Undertakings

Although the recitals precede the body of the contract, they sometimescontain the apparent statement of genuine obligations.

Such is the case in this agreement to accept joint and several liability:

"Whereas A now wishes to assign the Lease to B, which wishes totake it over, and A agrees that it will be jointly and severally liablefor the obligations undertaken by B pursuant to this Assignment."

In this undertaking to procure performance by third party entities:

"Whereas, the parties hereto propose that, pursuant to the termsand conditions hereinafter set forth, A shall cause W Subsidiary, acorporation to be incorporated under the laws of the State ofDelaware, a wholly-owned subsidiary of A, and B shall cause XSubsidiary, a corporation to be incorporated under the laws of theState of New York, a wholly owned subsidiary of B, to establish apartnership (the "Partnership") under the laws of the State of ...in which each Wand X will have a fifty percent (50%) interest."

In this agreement to indemnify:

"Whereas, A has agreed, in order to induce the Bank and W toassume the obligations as aforesaid: (i) to indemnity the Bank (forthe account of the Bank, and W as their respective interests mayappear) against any and all losses arising from the differencebetween the amount of funds expected to be forthcoming fromthe Ultimate Borrower and the aggregate amount of fundsrequired to service the Fiduciary Credit, the Swiss Franc Credit andthe Supplementary Credit, and to pay the Bank certain otheramounts in connection with arranging the financing ..."

In this provision concerning prices:

"Seller and Buyer desire to enter into a long-term Contract,whereby Seller will sell and Buyer will buy the naptha at prices conditions applicable from time to time to similar term contracts forsimilar quantities in Northwest Europe."

In this hardship clause:

"(Les societes soussignees) reconnaissent que l' esprit qui regit Iepresent contrat et qui a conditionne leur adhesion acelui-ci est unesprit de solidarite, suivant lequel chacune d'elles doit tenir


compte des situations propres des autres co-signataires. Notamment si l'application du present contrat infligeait al'une d'elles unprejudice anormalement eleve par rapport a celui suppose parl'ensemble d'entre elles, les societes soussignees acceptent que leseffets en soient equitablement repartis...."

In this warranty as to the quality of work to be carried out:

"A garantit une construction soignee effectuee suivant les regles del'art, concernant la manipulation d'un gaz corrosif et la pratiquedes installations frigorifiques au freon et al'ammoniac.

"A garantit aussi que l'etui et l'installation s'effectueront selon lesnormes bien connues d'elle par son experience pratique."

And in this definition of territory:

"Whereas, Licensee is desirous of manufacturing the Products withinthe following manufacturing area (hereinafter called theManufacturing Area), namely, that part of the United Kingdom ofGreat Britain and Northern Ireland (United Kingdom) includedwithin England and the metropolitan territories of Belgium, France,Federal Republic of Germany (West Germany), Italy, Luxembourgand Netherlands, the Product to be so manufactured for sale anduse within the following sales area (hereinafter called the SalesArea), namely, the British Isles, composed of the territory of theRepublic of Ireland and those parts of the United Kingdomincluded within Wales, Scotland, England and Northern Ireland; theterritory of Iran; continental Europe, composed of ... (etc ... )."

Sometimes the recitals even describe the parties' primary obligationsunder the contract:

• "Whereas the Contractor admits that unless the execution of theWorks is seriously hindered or delayed by unforeseen difficultieshe can by skill and diligence complete and deliver up and accordingly in his Tender has undertaken to complete and deliver up thewhole of the said Works on or before the ... day of ... OneThousand Nine Hundred and ..."

• "In consideration of the mutual covenant herein contained, theBuilder agrees to build, launch and complete One (l) Oil Tanker,more fully described in Article 1 hereof, to be registered under theflag of Liberia at the Shipyard in Japan, owned by the Builder ordesignated by the Builder at its sole discretion (hereinafter calledShipyard) and to deliver and sell to the Buyer, and the Buyer


agrees to purchase from the Builder and to accept delivery fromthe Builder the said Vessel, all upon the terms and conditions hereinafter set forth."

• "La convention dont Ie descriptif suit, a pour objet sur Ie plan local:"1) La concession par Ie concedant au concessionnaire d'une

maniere indissociable:de l'exclusivite d'exploitation de sa marque et de l'utilisation de son enseigne,de l'exclusivite de la fourniture en gros pour la revente audetail des marchandises portant l'etiquette . . . eteventuellement la marque, fournies en execution dupresent contrat, sous reserve de ce qui est ci-apres en cequi concerne les ventes directes.

"En consequence, Ie concedant s'interdit, dans Ie territoire concede, d' exploiter directement ou indirectement une chaine de distribution specialisee dans la vente d'articles concurrents, al' exception de la chaine ..."2) L'engagement du concessionnaire envers Ie concedant:

d'exploiter au mieux la marque et de maintenir Ie bonrenom de l'enseigne concedee, par Ie meilleur service auconsommateur,

"de s'approvisionner exclusivement, sous reserve de ce qui est dital'art.7 § 4 b pour les articles sus-indiques, aupres du concedantet des fournisseurs agrees par celui-ci, et de toute fa<;,:on d'acheterpar campagne de vente (6 mois) un montant minimum garanti demarchandises au concedant."

The different examples set out above raise some perplexing questions.If the recitals are to contain provisions that create true substantive obligations, where is the dividing line between the recitals and the body of thecontract? Should statements contained in the recitals be endowed with thesame legal significance as those contained in the body of the contract?22

9. Definition of Terms

A widely adopted practice is to define certain terms used in the contract. Sometimes, these definitions are put in the recitals. One example ofthis was already mentioned above in the case of the recitals which definecertain territories. Here is another example:

"For purpose of this Agreement, the following terms shall have themeaning designated in this Section, unless the context otherwiserequires:



"Mfiliate is any other person, who is directly or indirectly controlling it, controlled by it or under common control with that Mfiliate.

"RC Know-how means ... (etc ... )"

Agreement on defined terms certainly appears to constitute agreementon a substantive matter in the same way as the examples set out in SectionII.D.8 above amount to agreements on substantive matters.

III. RATIONALE FOR RECITALS

"What is the rationale for including recitals at the beginning of a contract?

It is difficult to provide a response to this question. Sometimes, it seemsthat inclusion of recitals results not from any particular reason but simplyfrom the desire to conform to established practice, without there being anyulterior motive.

More often, recitals are, however, drafted with the greatest of care andtheir contents reflect pre-occupations of one or both of the parties to thecontract. There are even instances in which the contents and the draftingof recitals are the subject of heated negotiations that are almost more difficult than those which relate to the body of the contract. This can be thecase when some of the statements contained in the recitals result from oneor more of the factors described above.

In the second part of this chapter we shall deal with the extent towhich the specific objectives resulting from these factors are likely to beachieved.

Occasionally it appears that inclusion of recitals is driven by entirelydifferent objectives, having nothing to do with the way in which the contract is to be performed. Some contract draftsmen include recitals in orderto provide information to the management of their companies; referenceto properly worded recitals allows readers who may have little time to readthe contract in detail and who may not be lawyers to set the contract in itscontext and to understand its essential features (some sort of an executivesummary). This may be a practical approach but it is not always without thedanger of adulterating the contract with an over-simplified summary thatmay contain imprecisions or even statements that contradict those made inthe body of the contract.

In other instances, certain passages contained in the recitals areintended to be read by third parties, for example the tax authorities,authorities that have to authorize the making of the contract, competitionlaw enforcement authorities, even trade unions, the hope being that such


passages will produce a favorable reaction. We already gave an example ofrecitals in which the objective of certain parts seems to be to support arguments in favor of compliance with the rules of competition. 23

Here is another example which has the clear aim of arousing the sympathy of the authorities of a developing country which would have toauthorize the contract.

"Considerant l'urgence de creer une infrastructure agro-industrielle, necessaire ala realisation des plans successifs de developpe-ment elabores par Ie Gouvernement du ... , la Societe aelabore un projet prevoyant la creation d'une Societe de droit .ayant pour objet la construction, l'installation et l'exploitationd'une ferme d'embouche, sise dans la region de ... ;

"Le montant de l'investissement prevu s'eleve a... L'exploitationde la ferme entrainera la creation d'environ 15 emplois (quinze)d'expatries et d'environ 680 emplois de (nationaux);

"Compte tenu de l'importance des capitaux investis;

"Eu egard al'ampleur des effets directs et indirects de l'investissement prevu sur l'activite economique;

"Compte tenu de la concordance du projet avec les objectifs duGouvernement de la Republique du ..."

Recitals are used in pursuit of a variety of objectives. Such diversity isbound to affect the legal implications.

IV. LEGAL IMPLICATIONS

A. Recitals and Similar Phenomena

Contracts are not the only type of legal documents that contain recitals.Often, the author(s) of written texts spontaneously feel the need to givesome explanation or justification. In the case of legal documents, settingout reasons is often mandatory in order to safeguard the rights of the person to whom the decision applies.

1. International Treaties

International treatises often begin with recitals. 24 Here is an extractfrom the recitals to the Treaty dated January 27, 1967 on the Explorationof Outer Space:

23 See supra, pp. 65-67.

21 P. You, I~e pdarnbule des traites internationaux, Fribourg, Librairie de ]'Universite,1941, 146 pp.;]. Corriente Cordoba, Valmar:ionjuridir:a de los !mambu,li)s de Ii)s Iralados inler-


"The States Parties to this Treaty,

"Inspired by the great prospects opening up before mankind as aresult of man's entry into outer space,

"Recognizing the common interest of all mankind in the progressof the exploration and use of outer space for a peaceful purposes,

"Believing that the exploration and use of outer space should becarried on for the benefit of all peoples irrespective of the degreeof their economic or scientific development,

"Desiring to contribute to broad international co-operation in thescientific as well as the legal aspects of exploration and use of outerspace for peaceful purposes,

"Believing that such co-operation will contribute to the development of mutual understanding and to the strengthening offriendly relations between States and Peoples,

"Recalling resolution 1962 (XVIII), entitled 'Declaration of LegalPrinciples Governing the Activites of States in the Exploration anduse of Outer Space,' which was adopted unanimously by theUnited Nations General Assembly on 13 December 1963, ...

"... Have agreed on the following: ..."

Article 31(2) of the Vienna Convention dated May 23, May 1969 on theLaw of Treaties expressly recognizes the value of recitals as an aid to treatyinterpretation.

2. European Union Acts

Article 253 of the EU Treaty provides that regulations, directives anddecisions of the Parliament and the Council, of the Councilor of theCommission are motivated and must refer to the proposals or to the opinions that had to be obtained pursuant to the Treaty.

An application of this can be seen in the Directive dated March 5, 1979on life insurance:

"The Council of the European Communities,

nacionales, Pamplona, Editiones Universidad de Navarra, 1973, 68 pp.; A. Salomon, foepreambule de la Charte, base ideologique de l'GNU, Geneva, Editions des trois collines, 1946,229 pp.


"Having regard to the Treaty establishing the European EconomicCommunity, and in particular Articles 49 and 57 thereof,

"Having regard to the proposal from the Commission (OJ No.635,28.3.1974, p. 9).

"Having regard to the opinion of the European Parliament (OJNo. C 140,13.11.1974, p. 44),

"Having regard to the opinion of the Economic and SocialCommittee (OJ No. C 109, 19.9.1974, p. 1),

''Whereas, in order to facilitate the taking up and pursuit of the business of life assurance, it is essential to eliminate certain divergenceswhich exist between national supervisory legislation; whereas, inorder to achieve this objective and at the same time ensure adequateprotection for policy-holders and beneficiaries in all Member States,the Provisions relating to the financial guarantees required of lifeassurance undertakings should be coordinated;

"Whereas ..."

There then follows a long series of recitals setting out the reasons foreach of the operative provisions of the Directive and ending:

"whereas it is important to guarantee the uniform application ofthe coordinated rules and to provide accordingly for close collaboration between the Commission and the Member States inthis field,

"Has Adopted This Directive

"Title I ..."

Particularly noteworthy is the requirement in Article 253 for referenceto proposals and opinions required under the ED Treaty.

The Court ofJustice has held that the obligation to set out reasons "isintended to allow parties to defend their rights, to allow the Court ofJustice to exercise its supervisory jurisdiction and to allow the MemberStates and any citizen thereof who has a legitimate interest to understandthe way in which the Commission has applied the EC Treaty. "2!J Academicwriters have asserted that setting out reasons also provides a means of information to the European Parliament, aids interpretation of the decision and

25 Judgment ofJuly 4,1963, HeR, 1963, p. 143.


is conducive to efficient functioning of authorities who have to look intothe reasons why the decision was reached. 26

Although the Court ofJustice requires less detailed reasoning of legislative texts then of decisions,27 one Regulation has nonetheless beenannulled for failure to set out sufficient reasons. 28

3. Constitutions

The Constitutions of certain countries begin with recitals. The recitalsto the Constitution of the United States of America set out as a Preambleare particularly well known:

"We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, providefor the common defence, promote the general Welfare, and securethe Blessings of Liberty to ourselves and our Posterity, do ordainand establish this Constitution for the United States of America."

The contents of recitals to Constitutions vary considerably. Sometimes,as in the above example, the recitals solemnly declare the promulgation ofthe Constitution that follows them (also the case in the recitals to the SwissConstitution of 187429 and the Constitution of the Republic of Ireland of1937). Sometimes the recitals set out certain caveats that would be inappropriate in the operative part of the constitution (for example the recitalsto the Constitution of the Federal Republic of Germany of 1949, whichcontained the caveat that the Constitution was to be temporary since it hadnot been assented to by the entire German nation). In other cases, recitalsto Constitutions contain solemn declarations of adherence to certain principles and to citizens' fundamental freedoms (for example the FrenchConstitutions of 1946 and 1958).30

The legal significance of recitals to Constitutions has given rise todebate. That legal significance varies from case to case. It may be that whileappearing to endow principles stated in the recitals with added solemnity,the draftsmen of the Constitution avoid the risk of parties relying on such

26 J. Megret et aI., Le droil de la Cornrnunaule er:onornique eurofJeenne, Brussels, ULB, vol.X, 1993, p. 524.

27 Id., pp. 505-506.

28 Judgment ofJuly 7,1981, ECR, 1981, pp. 1833-1934.

29 V.L. Waser-Huber, Die PraaTnbeln in den schweiuf7schen Verfassungen, Bern, PeterLang, 1988, 217 pp.

30 P. Biscaretti di Ruffia & S. Roszmaryn, La ConslilLllion r:ornrne loi IOfuJarnenlale dans

les Elals de l'EurofJe o(;(;idenlale el dans les Elals socialisles, Paris, L.G.DJ., 1966, pp. 42-43.


principles as a basis for judicial review proceedings.:H On the other hand,a tendency has been noted towards a stronger normative character to constitutional preambles, e.g., in France and in Germany.32

4. Statutes and Regulations

Legislation and instruments having regulatory character sometimesbegin with introductions comparable to recitals. Such introductions do notconstitute preparatory documents (which consist of documents issuedbefore the preparation of the draft instrument, the draft instrument itself,the statement of reasons for its enactment, parliamentary reports andaccounts of parliamentary discussions, etc.), which are analogous to precontractual negotiations and the different documents exchanged in thecourse thereof (for example letters of intent).33 Rather, they amount tointroductory remarks put into the final version of the legislative or regulatory instrument.

By way of an example, take the commencement of the Belgian RoyalDecree ofJuly 17, 1985, which amended the official interest rate: 31

"Baudoin, Roi des Belges,

"A tous, presents et avenir, Salut.

"Vu la loi du 5 mai 1865 relative au pret ainteret, notamment l'artide 2, modifie par l'arrete royal No. 147 du 18 mars 1935, confirme par la loi du 4 mai 1936, et modifie par la loi du 30 juin 1970et par les arretes royaux des 14 octobre 1974 et 28 juillet 1981;

"Vu les lois sur Ie Conseil d'Etat, coordonnees Ie 12janvier 1973,notamment l'artide 3, §ler, modifie par la loi du 9 aOllt 1980;

"Vu l'urgence;

"Considerant qu'il existe actuellement un ecart important entre lestaux d'interet pratiques dans les conventions courantes et Ie tauxde l'interet legal;

31 Id., p. 43.

32 C. Grewe & H. Luiz Fabri, Dmits constitutionnels eumpeens, Paris, PDF, 1995, pp.42-43.

33 Cf. Chapter 1 SLltJrCl. Likewise, no parallel can be drawn either with explanatorydocuments that are sometimes issued following the adoption of legislative or regulatoryinstruments, for example administrative circulars.

31 Moniteurbe(ge,July 23,1985.


"Considerant, des lors, qu'une adaptation du taux d'interet legals'impose au plus tot afin de reduire l'ecart entre ce dernier taux etceux pratiques sur Ie marche des capitaux;

"Sur la proposition de Notre Ministre de la Justice et de NotreMinistre des Finances et de l'avis de Nos Ministres qui en ontdelibere en Conseil,

"Nous avons arrete et arretons: ..."

Some of the these passages are of use in assessing the lawfulness of thedecree: the reference to the laws that are being implemented by the decree(under Article 159 of the Belgian Constitution, challenges to the lawfulnessof a decree can be made before Belgian courts) and reliance on the urgentneed for the decree to justify failure to request the opinion of the BelgianConseil d'Etat. 35 The passages beginning with the word Considhant havenot been drafted to comply with any legal requirement but simply toaccord with established practice. However, they may have considerableimportance in interpreting the decree.

5. Judgments and Awards

There is a further similarity between recitals to a contract and the statement of reasons contained in court judgments. The decision contained inthe operative part of the judgment is preceded by a statement of the reasons upon which it is based. For example, judgments written in the traditional French judicial style consist of a series of paragraphs beginning withthe word attendu or considemnt leading to the words paT ces motifs precedingthe operative part of the judgment.

What is to be found in the statement of reasons? Statements concerning the attributes of the parties, a description of the dispute, the argumentsput forward by each of the parties, some discussion relating to and the reasons why the court has come to its decision. All of these are, mutatis mutandis, similar to the contents of recitals to contracts.

In many countries, setting out the reasons on which a judgment isbased is a legal requirement, stemming from the Constitution of the country in question (for example Article 149 of the Belgian Constitution).Litigants clearly need to know the reasons for ajudgment that will be binding upon them. This is a feature of the smooth administration ofjusticeand a protection against judicial arbitrariness. Absence of or defects in the

35 In Belgium, the Conseil d'Etat comprises a legislative section, whose mission is togive prior opinion on legislative and regulatory drafts (laws coordinated on January 12,1973, Art. 2-6bis).


reasoning leading up to a judgment can provide a basis for appeal. Therequirement to state reasons for ajudgment obliges judges to specify theirviews before deciding. By analyzing the reasons upon which judgments arebased, lawyers can identify attitudes of the courts to various issues andtrends in case law.36

Some parts of the statement of reasons can have an even more specificsignificance. It may be the case that the judge fails to properly distinguishbetween those issues that should be dealt with in the statement of reasonsand those that should be dealt with in the operative part of the judgment,and thus determines a substantive issue in the statement of reasons ratherthan in the operative part. In such cases, the form of the judgment is considered to be of little importance, and determinations made in the contextof the statement of reasons will nonetheless be regarded as res judicata. 37

Under many jurisdictions and also as a result of several internationalconventions or rules of arbitration, arbitral awards must also state the reasons on which they are based.38 The reasons for this requirement are similar to those in relation to court judgments. In addition, a statement ofreasons can be informative for the courts if proceedings are instituted challenging the award or its enforcement. 39 Including a statement of reasonsin arbitral awards is also of particular value to efforts to reconstitute a newlex mercatoria.40

Irrespective of whether an instrument is a piece oflegislation or ajudgment, the operative part is often preceded, in the instrument itself, by anexplanation (short or long) that is not always devoid of legal significance.The explanation may consist of cross-references to other instruments,allowing the reader to verify the lawfulness of the instrument; it may consist of a series of reasons capable of serving as the basis for proceedingschallenging the validity of the instrument if it is legally defective; it may

36 Dalloz, Nmw. Ref). de Droit, 2nd ed., 1963, Vol. fugement, No. 65.

37 Id., No. 64;]. Van Compernolle, Considerations sur la nature et l'etendue de l'autorite de la chose jugee en matiere civile, note under Casso b., Sept. 10, 1981, Rev. erit.Jur. R., 1984, pp. 260-264.

38 R David, L'arbitrage dans le wrnrnerce international, Paris, Economica, 1982, pp. 442456. The dominant tradition was different in English-speaking countries, but even therethe trend has developed towards increasingly stating the reasons for arbitral awards (seeP. Sanders, Quo vadis arbitration?, The Hague, Kluwer Law International, 1999, pp.31-33).

39 M. Huys & G. Keutgen, L'arbitrage en droit belge et international, Bruxelles, Bruylant,1981, p. 306; P. Sanders, op. cit., 33.

40 R David, Of). cil., pp. 455-456; KP. Berger, The international arbitrators' application of precedents, J Int. Arb., 1992, pp. 1-22; RA. Schtitze, The precedential effects ofarbitration decisions,] Int. Arb., 1994, pp. 69-75.


consist of a statement of principles or objectives that can be used to aid theinterpretation of the instrument.

Analyzing the different effects of recitals on legislative instruments andcourt judgments prompts one to carefully consider the possible legal significance of recitals preceding contracts, and perhaps, to extrapolate fromcertain apparent analogies. It should be remembered, however, that unlikelegislative instruments and court judgments, contracts are agreementsbetween parties, and not unilateral decisions taken by public authorities.This suggests the need for caution in placing too much emphasis on thesimilarities between the two.

B. Legal Effects of Recitals to Contracts

What legal significance should be given to recitals? Do the contents ofthis part of the contract, distinguishable from the body of the contractbecause of the form they take,41 have any legal effect?

In view of the subject matter of most recitals, this may be open todoubt. If the parties feel the need to include recitals, separate from theoperative part of the contract, it is because they wish to deal with mattersthat have no place in the body of the contract. After all, recitals do not generally set out contractual rights or obligations. Prima facie, describing theparties' objectives in entering into the contract or the circumstances leading up to and surrounding the contract or even setting out the pre-contractual negotiations, do not seem to create any legal rights or obligations.

However, some recitals contain provisions that may create contractualobligations. 42 In addition, a more thorough examination of recitals suggeststhat even those that are more literary in style can produce a variety of different legal effects.

Thus, recitals mayor may not create legal effects. In practice, recitalsoften contain elements of both kinds. 43

The account, which follows, sets out the Working Group's conclusionson the legal effects of recitals. Given that their legal effects have been givenlittle attention in most legal systems, the Group's conclusions cannot, forthe most part, be based on case law or on the theories of academic writers.

41 Cf. supra, p. 62. The formal distinction between recitals and the "operative part"of the contract, as well as its practical importance, are also stressed by M. Anderson,Drafting and negolialing cmmnercial wnlnu;ls, London, Butterworths, 1997, p. 28.

42 Cf. supra, pp. 76-78.

13 Cf. F.W. Grosheide, op. cit., p. 317.


For this reason, they are put forward somewhat tentatively. English law is tobe distinguished from other legal systems since certain aspects of the legaleffects flowing from recitals have been dealt with in English case law goingback as far as ... the 15th century.44

What, then, are the legal effects that may flow from recitals?

• Recitals may serve as an aid to the interpretation of a contract.• Statements contained in recitals can shore up a claim for avoid

ance due to defective consent (vice du consentement) or misrepresentation.

• Sometimes, factual circumstances described in recitals can amountto the "bases upon which the contract has been entered into"( Geschiiftsg;rundlage or presupposizioni), changes that can, in variouslegal systems, create a right to amend the contract.

• Acknowledgements given by a party in the recitals can be used asgrounds to estop that party from subsequently adopting a courseof conduct that is inconsistent with those acknowledgements.

• Descriptions of the parties' particular attributes and skills can influence the interpretation of their respective obligations and theextent to which they incur any liability for breach of the contract.

• Recitals, which give an account of the pre-contractual negotiations, can be used to determine the legal status of pre-contractual documents.

• References to other connected contracts or to third parties cancreate legal linkage between those other contracts or those thirdparties and the contract that contains the recitals.

• Recitals may already contain substantive contractual provisions.• It may even be arguable that some statements contained in recitals

can serve to demonstrate that the transaction is simulated or provide the basis for claims by third parties.

1. Interpretation of the Contract

A principle common to many legal systems is that a contract should beinterpreted in accordance with the intentions of the parties to it. Clearillustrations of this principle can be found in Article 1156 of the FrenchCivil Code and in Article 1362 of the Italian Civil Code.4!J

11 Skinner 1J. Gray (1595), note to Mount 1J. Hod,f.!:kin (1554), 2 Dyer 116a, quoted byIIalsbury's Laws of England, London, Butterworths, 1975, vol. 12, Deeds and otherInstruments, § 1509, note 11.

45 On the interpretation of contracts in comparative law, cf. infra, Chapter 3, pp.106-114.


Recitals can contain many details that clarifY such intentions. This isparticularly true where the recitals describe the parties' objectives inentering into the contract (the recitals can then be used in connectionwith a teleological interpretation of the contract) or the circumstancessurrounding the making of the contract. In addition,judges and arbitrators may be assisted in interpreting a contract by statements made in therecitals that convey the context of the economic policy pursued by thegovernment concerned or that make reference to the New InternationalEconomic Order. 46

However, other rules of contract interpretation give precedence to theintentions of the parties as they are actually expressed in the contractrather than inquiring as to what the parties' true intentions might havebeen. Principally for reasons of legal certainty, precedence is give to whata reasonable man would regard as the objective meaning of the words usedin the contract. If the meaning of the words is clear, no different meaning,which the draftsman may have had in mind when he drafted the contract,will be sought.47

Although theoretical discussions about these two approaches to contract interpretation have aroused less interest in England than in continental Europe, the rules of English law give precedence to the will of theparties as expressed in the contract.48 As a result, use of recitals to determine the meaning of provisions contained in the operative part of the contract is not permitted if the provisions in question are clear in meaning(whereas Article 1156 of the Napoleonic Code could allow such use) .49 Butrecitals may be referred to if a provision contained in the operative part isambiguous. English law contains an important body of case law on the rolethat recitals mayor may not have in the interpretation of contracts. 50

46 Cf. SLlfJTa, p. 67.

47 Cf. infra, Chapter 3, pp. 110-111; C. Del Marmol & L. Matray, L'importance etl'interpretation du contrat (dans ses relations avec l'arbitrage commercial international),Rev. Dr. Int. Dr. Comp., 1980, pp. 158-208.

Both approaches were defended when drafting the German BGB (compare §§ 133and 157) but precedence is given to the expressed rather than real intention of the parties (K. Zweigert & H. Katz, Anintmduction to comparative law, 3rd ed., Oxford, ClarendonPress, 1998, pp. 403-406); also see A. Rieg, I"e role de la volonte dans l'acte juridique en dmitcivilfrancais el allemand, Paris, L.G.DJ., 1961, pp. 358-420.

4S Cf. infra, Chapter 3, pp. 112-113; C. Del Marmol & L. Matray, op. cit., pp. 177-181.

19 In spite of exceptions, this remains the most important point of differencebetween the English and continental systems (Cf. F.W. Grosheid, op. cit., p. 319.

50 Odgers, op. cit., pp. 149-154 and the cases cited; Halsbury's Law ofEngland, vol. 12,op. cit., §§ 1509-1511 and the cases cited; K. Lewison, The interpretation of contracts, 2nded., London, Sweet & Maxwell, 1997, pp. 265-277; A.GJ. Berg, Drafting commercial agree-


In view of their fundamental differences of approach to contract interpretation, legal systems do not all attach the same value to the contents ofrecitals as an interpretative aid. This should be borne in mind. But, it isalways a matter of degree and it appears that all legal systems allow recitalsto playa greater or lesser role in resolving disputes over how contractualprovisions are to be interpreted. This role is recognized in certain practical guides to contract drafting!)l and should be considered together withthe interpretative value accorded to the recitals to certain ED legal instruments52 and to international treaties.53

On the other hand, published arbitral awards confirm the interpretative value of recitals, but they also reveal a clear tendency towards a contextual interpretation of the contract, in which the operative part and therecitals help to interpret each other. This approach is explained by the factthat arbitral awards tend to pay scarce attention to the law applicable inmatters of interpretation.51

The role of recitals as an aid to contract interpretation may becomemore significant given the current tendency to use word processors to draftcontracts that are thus becoming increasingly standardized. Recitals lendthemselves less to such a development; instead, they are becoming theplace of refuge for items that are specific to a particular contract and whichtherefore individualize and personalize that contract.

rnenls, London, Butterworths, 1991, pp. 53-55; M. Anderson, Of}. cil., p. 28; M. Anderson,A-Z guide 10 boilerf}lale and r;ornrnen;ial clauses, London, Butterworths, 1998, p. 154.

In case of a clear contradiction between a provision in the recitals and a provisionin the body of the contract, one finds opposition between the two approaches to contract interpretation: the theory of declared intention gives priority to the clearly writtencontractual provision, whereas the theory of real intentions allows use of recitals to provethe intention. The two theories converge in result when the contractual provision isambiguous.

51 See sUfJTa, p.; the UNCITRAL Guide on construction of industrial works confirmsthat "the extent to which the recitals are used in the interpretation of a contract mayvary under different legal systems" (op. cit., p. 49).

52 Cf. supra, pp. 81-83.

53 Cf. sUfJTa, pp. 80-81.

54 ICC Award No. 4132 (1983), Clunet, 1983,891, X Yearb. Cornrn. Arb., 1985,49; Adhoc Arbitral Tribunal (B. Gomard), ElfAquitaine Iran v. National Iranian Oil Cornpany, PI.£V.Arb. 1984,401, XI Yearb. Cornrn. Arb., 1986,97; ICC Award No. 7181 (1992), XXI Yearb.Cmnrn. Arb., 1996, 99; ICSID Award., SPP (Middle Easl) Lid. v. Egyf}l, 20 mai 1992, Rev. Arb.1994,189; ICC Award No. 7639 (1994), XXIII Yearb. Cornrn. Arb., 1998,66; ICC AwardNo. 7314 (1995), XXIII Yearb. Cornrn. Arb., 1998,49; ICC Award No. 7337 (1996), XXIVYearb. Cornrn. Arb., 1999, 149.


2. Vices de Consentement, Misrepresentations

Often, recitals highlight circumstances that have been instrumental inthe making of the contract. They may refer to statements of fact (for example the proximity of hydrocarbon or mineral reserves) or representationsmade by one of the parties (for example, the ownership of a patent).

The various legal systems contain rules that allow a party to challengecontractual obligations that it accepted before it was in full possession ofall the relevant facts.

For example, under French Law (Article 1110 of the French Civil Code),a contract can be terminated on the basis of substantive error (erreur substantielle) or on the basis of fraud (dol:) (Article 1116 of the French CivilCode). The applicant has to prove the existence of factors that vitiate itsconsent (vices de consentement) , and statements contained in the recitals tothe contract can sometimes provide the necessary proof.

Hence, highlighting certain facts in the recitals can contribute greatlyto the proof of a mistake (er-n;ur) , and, particularly, its substantive character.!):) Under French law, error as to a party's reasons for entering into acontract will, in principle, be considered. However, it can be taken intoaccount if these reasons were determining factors in the plaintiff's decision to enter into the contract and if the parties have agreed to bring suchreasons within the ambit of the contract. These two conditions might besatisfied if the reasons in question have been highlighted in the recitals tothe contract.

Including in the recitals a statement by one of the parties that provesto be false may, in certain circumstances, facilitate proof of fraud. In addition, the absence of certain statements in situations in which they shouldnormally have been made can help prove fraud by silence (r-eticence dolosive) ,56 given the current emphasis on the obligation to provide information at the time of entering into a contract.

Alternatively, the inclusion of certain statements in the recitals can subsequently be used to prove that the parties entered into the contract in fullknowledge of all relevant facts, thus providing an effective defense to anyclaim for termination on the basis of error or fraud.

55 For a case where this condition was not satisfied, d. ICC Award No. 6363 (1991),XVII Yearb. Cmmn. Arb., 1992, 186.

56 Cf. e.g.,j.P. Masson, Les fourberies silencieuses, note under Casso b.,june 8 1978,Rev. Crit.Jur: H, 1979, pp. 527-542.


Under English law, the rules on misrepresentation allow for variousremedies for a party who has suffered loss as a result of a false statementmade by the other party, with the clear intention of making the injuredparty enter into the contract (Misrepresentation Act 1967).:")7 Recitals oftenharbor such false statements.

3. Bases on Which the Contract Was Entered Into

Following a change in circumstances, to continue to perform a contract, may become difficult for either of the parties. A change in government may modify commercial trends and make certain markets less favorablefor exportation. A technological breakthrough may render obsolete thegoods being sold under a long-term supply contract. Is it possible to amendthe contract so as to adapt it to the changed circumstances or even to terminate it?

This problem arises in all legal systems, but its resolution takes different forms based on a variety of legal concepts (imprevision, caducite, Wegfallder Geschaftsgrundlage, presupposizioni, frustration, etc.) that often involve reference to the bases on which the contract was entered into.58

In cases where its governing law allows a contract to be challenged byreason of change in circumstances, recitals can playa important role insofar as statements contained in them describe, in detail, the bases for themaking of the contract or the environment in which it was concluded. Forexample, statements in recitals may indicate that parties have entered intoa contract because of the existence of an effective distribution network orbecause of one party's access to preferential terms of supply from one of itsaffiliates. Should the contractual relationship have to continue if these circumstances no longer pertain?

Using recitals to describe the circumstances prevailing at the beginningof the contract can also help a party if it wishes to avail itself of a hardshipclause in the future. 59 Hardship clauses can be made more effective if theycontain an express reference to the circumstances described in the recitalsto the contract.

Is it possible to go even further and take the view that reference inrecitals to the factual context indicates the parties' intention to challengethe contract if those facts no longer pertain, even if the contract contains

57 For an account of the rules of English law on misrepresentation see, for example,J. Beatson, Anson \ Law o!Conlnu;l, 27th edo, Oxford University Press, 1998, ppo 233-269.

5f; Cf.in/ra, Chapter 9, pp. 453-455.

59 On hardship clauses, cf. irifra, Chapter 90


no hardship clause? This issue turns on the interpretation of the contract,which will itself depend on how the contract's governing law establisheshow the occurrence of unforeseen circumstances can affect the contract.

On the other hand, reference in the recitals to the New InternationalEconomic Order, an example was cited earlier,60 can, in itself, suggest aright for one of the parties to precipitate a re-negotiation of the contractin the event of a change in circumstances. Such mitigation of the principleof pacta sunt seTvanda will depend on the content of the New InternationalEconomic Order.6 ]

4. Estoppel

Under English law, a party cannot, in certain circumstances, contradictwhat it has acknowledged in writing, in a recital for example. In all cases,the acknowledgement in question must be clear, precise and without ambiguity. English case law indicates reluctance to find estoppel on the basis ofacknowledgements made in recitals. 62

5. Effect on the Parties' Obligations and on the Extent of Their Liability for Breach

Our description of the contents of recitals has emphasized the frequent insistence on praising a party's particular qualifications and attributes ("among the world leaders in its field"). 63 Praise of this kind is notgiven without ulterior motive. By admitting to be regarded as highly specialized in its particular area, a party agrees, in advance, to the standard bywhich the performance of its obligations under the contract will be judged.A party that operates at the highest level of its profession should performits obligations in a manner worthy of its reputation. As such, assessing the

60 Cf. supra, p. 67.

61 S.K.B. Asante, Stability of Contractual Relations in the Transnational InvestmentProcess, 28 Ini. Cornf). Law Q. (1979), pp. 401-423; O. Lando, Renegotiation andRevision ofInternational Contracts, Gemwn Yearb. ofInt. Law, 1980, pp. 37-58. It shouldbe remembered that the New International Economic Order is referred to in severalinstruments adopted by the U.N. on the basis of the Declaration and Action Program ofMay 1, 1974 (Resol. No. 3201 and 3202). See the comments on the New InternationalEconomic Order in L. Matray, Arbitrage et ordre public international, in The Art (!!Arbitration (Liber Amiconun P. Sanders), Deventer, Kluwer 1967, pp. 252-267.

62 Odgers, op. cit., pp. 154-158 and the references quoted; K. Lewison, op. cit., pp.275-276. Concerning estof)f)el, d. E. Gaillard, L'interdiction de se contredire au detriment d'autrui comme principe general du droit du commerce international, Rev. Arb.,1985, pp. 241-258; B. Fauvarque-Cosson, L'estoppel du droit anglais, in L'interdiction de secontredire au detriment d'autrui, M. Behar-Touchais (ed.), Paris, Economica, 2000, pp. 3-25.Also see the new Article 1.8 of the Unidroit Principles, 2004 edition. On non-waiverclauses, d. infra, Chapter 3, pp. 163-167.

63 Cf. supra, pp. 63-65.


quality of goods that it delivers or services that it provides will be made byreference to the highest standards for such goods or services Emphasizinga party's qualifications or attributes is therefore consistent with high expectations in relation to that party's obligations and liability.

On the other hand, sometimes (as mentioned earlier(4), a party uses

recitals to emphasize its lack of skill in the area in which its counterpartywill perform obligations under the contract. In such circumstances, the aimis to reinforce the high standard expected of the latter party because, frequently, a higher standard of performance (obligation to give proper information for example) is to be expected if a person enters into a contractwith an another is not engaged in that business.

Some provisions contained in recitals may, in a different way, affect theextent to which a party incurs liability for breach of contract. When thegoverning law of a contract limits the damages payable following breach todamages payable for foreseeable loss,65 stating certain facts in the recitalscan amount to proof of how foreseeable an alleged loss actually was. Nodoubt, the famous case of Hadley v. Baxendalewould have been decided differently if the contract of carriage made between the parties had includeda recital explaining the particular importance of the piece of equipmentbeing transported and the fact that it was needed in order to allow theplaintiff's mill to recommence operations.66

6. Status of Pre-Contractual Documents

Listing pre-contractual documents in recitals can, subject to other indications, be taken to bear testimony to what the parties regard as the mainstages of the pre-contractual negotiations. In the event of a subsequent dispute as to the meaning of certain provisions in the contract, such a list ofpre-contractual documents may, governing law permitting, provide clues asto the parties' true intentions.

In some cases, recitals specify the status to be given to pre-contractualdocuments, either by stating that such documents are to be referred to in

64 Cf. supra, pp. 63-65.

65 Such is the case in English law, (M. Elland-Goldsmith, Les principes generaux dudroit anglais et les operations internationales, D.P. c.l., 1980, pp. 465-466), as well asunder Article 1151 of the French Civil Code (Ph. Malaurie & L. Aynes, Cours de droit civil,Tome VI, Les obligations, Paris, lOth ed., 1999, No. 839-842; see alsoin:fra, pp. 329-393.

66 9 Ex. 341,156 Eng. Rep. 145 (1854). In this case, the owner of the mill did notsucceed in obtaining damages from the carrier for loss resulting from the cessation ofoperations at the mill following delay in performance of the contract of carriage,because the carrier was not aware of the particular importance of the item that it hadcontracted to transport.


order to fill any gaps in the contract, or, conversely, to state that they aredevoid of legal effect and that the contract alone contains all the terms ofthe agreement between its parties. Some examples appeared above.67

Provisions of this kind, even if placed in the recitals to a contract, clearlyhave the effect of operative provisions; they can be and frequently are, setout in the body of the contract. 68

7. Links With Other Contracts or With Third Parties

Reference in a contract's recitals to other contracts with which the contract is in some way connected can result in the creation of a legal nexusbetween these contracts.69

Sometimes, such a nexus is expressly created, as in the case of a subcontract which refers to the main contract and links certain obligationsarising under the sub-contract with those arising under the main contract.In an example given above,7o the recitals contain a true quoted substantiveprovision that could, and should preferably, be inserted in the body of thecontract.

Other recitals simply refer to other contracts without, in any way, stating what (if any) legal consequences are to result from these references.References of this kind can, at the very least, have some role in the interpretation of the contract in which they are contained,71 or alternatively, towhich they refer. In some instances, the connected contracts are, in economic terms, to be seen as the raison d'etn: of the contract in whose recitalsthey are referred to. Consequently, such contracts can form part of theGeschaftsgrundlage of the contract in question. This may result in the lattercontract being affected by matters that relate to the connected contracts(such as their non-existence, voidness, termination, caducite, etc.) .72 Issues,such as this, should be clearly dealt with in the body of the contract.

Furthermore, references in a contract's recitals to other contracts canindicate a legal nexus between all of the contracts and justifY that different

67 Cf. SLlfJTa, pp. 73-74.

68 Concerning entire agreement and four corners clauses, d. infra, Chapter 3, pp.129-150, with an analysis of the problem of conflict between recitals and entire agreement clauses.

69 Cf., in general, Les r:[!els du wulral (ll'eganj des liers, Cornf)(Lraisous fraru;o-belges, M.Fontaine &J. Ghestin (ed.), Paris, L.G.DJ., 1992,464 pp.

70 Cf. supra, p. 72.

71 For an example, d. ICC Award No. 6829 (1992), XIX Yearb. Cmnrn. 11rh, 1994, 167.

72 Compare M. Fontaine, Aspects juridiques des contrats de compensation, D.P. G.I,1981, pp. 211-212 as well as severability clauses, infra, Chapter 3, pp. 167-176.


proceedings that, individually, should have been brought before differentcourts, could be brought together before a single court.

Finally, a more recent development should be pointed out. In twocases, the plaintiff requested arbitration against a third party, which wasidentified in the recitals of the contract. In the first case, the arbitral tribunal, on the basis of the case file, concluded that the parties had envisaged that the third party was also bound by the contract. 73 In the secondcase, any such extension was refused. 74 In principle this second approachshould be approved. When the operative provisions of the contract areclearly separated from the recitals, a non-signatory is not to be bound bythe arbitration clause of the contract. However, these cases establish therisks that are associated with an identification of a third party in the recitals.In practice, this is particularly relevant when dealing with groups of companies and State contracts.

8. Substantive Provisions

Finally, recitals may contain provisions that actually give rise to substantive rights and obligations. Examples of this have just been cited withregard to pre-contractual documents and to links with other contracts. Alsocited before were examples of recitals containing provisions establishingjoint and several liability, obligations to obtain a third party's undertakings,provisions relating to the calculation of prices or the definition of a contractually allotted territory, hardship clauses and even provisions setting outthe parties' fundamental obligations.7S Attention should also be drawn tothe practice of including the parties' identity,76 a list of contractual documents77 or definitions in a contract's recitals.78

In other instances, recitals can indicate the termination of a prioragreement, contain an agreement to undertake future negotiations or set

73 Iran-U.S. Claims Tribunal, Agrostruct International Inc. V. Iran State Cereals Organization, Award No.5, April 15, 1988, XN Yearb. Cmmn. Arb., 1989,354.

74 See Paris,]uly 7,1994, Rev. Arb., 1995, 107.

75 Cf. supra, pp. 76-78. For example, cf. Trib. Gr. Inst. Paris, March 26, 1986, Reo. Arb.,1987, 179, note Ph. Fouchard; an arbitration clause contained in the recitals precedingthe operative provisions of a group insurance policy was considered to be enforceable.

76 Cf. Trib. Premiere Instance Geneve, March 13, 1986, XII Yearb. Cornrn. Arb., 1987,514. In this case, the identification of a party and the mention of its location inSwizerland in the recitals were considered to be relevant in respect to a problem of Stateimmunity.

77 For an example of recitals enumerating the contractual documents and establishing their hierarchy, see Paris, December 1, 1995, Rev. Arb. 1996,456.

78 Cf. sU!JTa, pp. 78-79, as well as definition clauses, ir~fra, Chapter 3, pp. 153-156.


out conditions precedent (such as the receipt of an authorization) subjectto which the contract will take effect.

Although provisions of these types would be more appropriatelyincluded in the body of the contract, legal systems rarely favor form oversubstance. As such, sloppiness by contract draftsmen will not lead to suchprovisions being deprived of their normal legal effects. 79

This was the conclusion reached by the Rennes Court of Appeal in1984.80 A group of traders entered into an agreement to form a limitedcompany with a view to running a shopping arcade. The recitals to this contract included a passage in which the parties agreed not to modifY their initial assortment. This statement was not included in the body of theagreement. The critical issue was to determine whether the statement inthe recitals could establish contractual obligations. The Rennes Court ofAppeal decided in the affirmative:

"Considerant que Ie contrat de societe forme un tout dont il n'estpas possible de dissocier la partie "preambule" pour lui donnerune simple valeur explicative d'une convention allant suivre;

"Qu'il suffit pour s'en persuader de constater que cette partie contient non seulement l'enonce de principes generaux devantpresider au fonctionnement de la galerie marchande mais aussicelui de toute une serie d'obligations precises (dont celui de nepas "modifier l'assortiment initial") pesant sur des associes presentsou futurs; qu'en signant une telle convention ces associes adheraient a un contrat dont Ie preambule etait partie integree, ayantvaleur conventionnelle et dont l'homogeneite implique que toutesses composantes soient soumises en cas de difficultes a la procedure d'arbitrage stipulee par l'article 57 du contrat."

One should also note that in the first of these two paragraphs, theCourt recognized the recitals to have at least an explanatory role, that is tosay, a role in interpreting the contract.

In cases where recitals appear to record a true contractual obligation,care should be taken to ascertain whether the relevant provision is repro-

79 Compare this with the similar situation in which, rnutatis rnutandis, res judicata willapply with respect to statements made in the passages of a court opinion which set outthe reasons for the j udgement (d. SLlfJTfL, p. 86).

The law applicable to the contract may affect this matter. Concerning English law,cf. A.G.J. Berg, op. cit., pp. 53-54.

80 Rennes, Sept. 26, 1984, Rev. Arb., 1986,441.


duced and elaborated in the body of the contract. Sometimes recitals summarize certain obligations that will be contained in the contract. In such asituation, the provision contained in the body of the contract is, as a matter of principle, the source of the relevant obligations. But the method isdangerous, because of the risk of contradiction. This comes back to theissue of contract interpretation dealt with above.S1

9. Simulated Transactions-Obligations in Favor of Third Parties

We have already referred to instances in which recitals contain statements intended to incur benevolence on the part of third parties such astax authorities, competition law enforcement authorities or a foreign government.82

If such statements are not consistent with reality, the issue of how thelegal system in question deals with simulated transactions becomes relevant. With regard to the relationship between the parties to the contract,their real intentions generally prevail, notwithstanding what their apparent intentions are expressed to be. However, to avoid future dispute, it isadvisable that the parties sign a side-letter (contre leUrp) although there isalways the risk, at least under French law (Article 1321 of the French CivilCode), that third parties will have relied upon the false statement in therecitals and may enforce their rights accordingly. One should also bear inmind that such simulation often amounts to fraud and is therefore oftenunlawful. 83

In other instances, passages are included in recitals that are intendedto be read by third parties with no aim to mislead. They simply re-state theterms of an agreement resulting from previous negotiations with such thirdparties. For example, acquiring shares in an insolvent company may beauthorized by the relevant public authorities only in return for assurancesabout maintaining employment for the company's employees.84

Could not recitals, which confirm such assurances and which are published (for example when they are used in a press release), amount toundertakings enforceable by third parties, a government or trade unionhaving some interest in the transaction?

81 Cf. supra, pp. 88-90. See, however, Christou's suggestion to include a clause in theoperative part confirming the obligations stated in the recitals (R. Christou, Boilerplatepractical clauses, 2nd ed., Londres, FT Law & Tax, 1995, p. 5).

82 Cf. SU!JTCl, p. 67.

/;3 With regard to simulated transactions under French law see, J. Ghestin, Chr.Jamin & M. Billiau, Traite de dmit civil, Les ejfets du contrat, Paris, L.G.DJ., 3rd ed., No.865-921.

84 Cf. SU!JTCl, pp. 79-80.


10. Contractual Provisions on the Effects of Recitals

The various legal effects of recitals described above may arise if thecontract contains no express provision stating the effects which its recitalsare to have.

It is very rare for parties to make express provision as to such effects.Here is an example where this was done, taken from a Japanese Distribution Agreement:

"Article XXII-Entire Agreement.

"This Agreement constitutes the entirety of the covenants betweenthe parties hereto with respect to the matter hereof. It supersedesand cancels any and all previous covenants, agreements, distributorship rights and undertakings either writing or verbal. It may notbe amended except by an agreement in writing established betweenthe parties and signed by their respective duly authorized officers.

"The recital of this Agreement shall have same force and effect asthe text hereof."

Here are the recitals to the Agreement:

"Whereas A manufactures and sells the automotive productsknown as ... and desires to establish and develop the market forits products in the territory defined, and

"whereas the Distributor is willing to purchase ... to import theminto the above territory for distribution, and

"whereas the parties now wish to fix the terms and conditions oftheir relationship and agree to bind themselves by this Agreement,which supersedes and cancels any and all previous covenants,agreements and undertaking, either verbally or in writing, whichmay conflict, amend or abridge the terms and conditions hereinafter set forth.

"now, therefore, in consideration of the premises and the mutual undertakings herein contained, the parties hereto agree as follows: ..."

What can be the legal effect of wording such as this, which providesfor the recitals having the same force and effects as the body of the contract? One may wonder whether such wording adds anything at all to whathas been said above. The only parts of recitals, which can have the sameeffect as provisions contained in the body of the contract, are those that


amount to operative provisions, which would be more appropriately contained in the body of the contract (for example, the third paragraph ofthe recitals quoted above, which supersedes and cancels all previous agreements between the parties). In any event, provisions that describe the parties ("A manufacturers and sells automotive products") or their objectives.("A ... desires to establish and develop the market for its products ...")clearly cannot amount to operative provisions in the same way as thosecontained in the body of the contract in spite of any provision that purports to give them the same force and effect as provisions contained in thebody of the contract.RS

Conversely, Grosheide wonders what to think about the following hypothetical clause that this author thought up for the purpose if his article.86

"The recital of this agreement shall have no force and effect whatsoever and may not be taken into account as an aid to construction."

Quite rightly, Grosheide refers to the legal effects of entire agreementclauses. The above clause has similar purposes by retraining the interpretation capacity of ajudge or an arbitrator. The analysis of substantive andevidential law in the following chapter on interpretation clauses87 seems tobe relevant to this hypothetical clause.

V. ADVICE TO NEGOTIATORS

The legal effects that may result from recitals should not be underestimated. In a variety of ways, recitals can have important repercussions fora contract and for its parties.

For this reason, particular care should be taken when drafting recitals.In practice, this does not always happen; some contract draftsmen become

S5 Two Italian authors have suggested the following clause in an attempt to find acompromise between the binding force of the recitals and the priority to be given to theoperative part: "Now, therefore, in accordance with the foregoing recitals which are anintegral part of this Agreement and which are subject to the detailed terms and conditions hereinafter set forth, ITALlA and ELECTRONIC SERVICES agree as follows: ..."(M. Bianchi & D. Saluzzo, I contratti internazionali, Techniche di redazione e clausole contrattuali, Volume 1, Milan, II sole 24 ore, 32). Such a clause seems to have the disadvantagenot to oblige drafters to clearly distinguish between, on one hand, what they consider tobe the hard core of contractual undertakings and on the other hand statements pursuing different purposes. However, the suggested clause could be useful in a system likethe English one, where courts have formulated principles of interpretation liable toreduce the effets of recitals. The clause would then tend to protect drafters, thus givingmore flexibility in negotiations.

S6 EW. Grosheide, op. cit., p. 321.

87 Cf. infra, Chapter 3, pp. 105-119.


less rigorous when drafting this introductory part of a contract and makeit appear more a work of literature than a legal document. This Chapterconcludes with a checklist:

1. Recitals are rarely a necessity. A contract without recitals is, in principle, entirely valid. The inclusion of recitals should not resultfrom a desire to merely follow a certain tradition. Rather, it shouldbe the result of a conscious decision. Are the provisions, which areintended to be put in the recitals, liable to produce desirable legaleffects or could they increase the risk of future disputes betweenthe parties?

Each party to a contract will not always give the same responseto these questions and it may be that the parties have conflictinginterests in relation to certain provisions in the recitals. This justifies the same degree of care in negotiating recitals as that given tothe negotiation of the body of the contract. Particular care shouldbe given when determining the appropriate part of the contract inwhich various provisions are to be inserted. This should be decidedaccording to the nature of the provisions in question.

2. The most widespread effect of recitals is to serve as an authoritative aid to the interpretation of a contract.ss This should be bornein mind when describing the circumstances surrounding the entering into the contract and the objectives pursued by the parties.Such descriptions will undoubtedly be in the basis for any futurediscussions between the parties in relation to issues of interpretation of provisions contained in the contract. In addition, they willbe closely scrutinized byjudges or arbitrators called upon to adjudicate any dispute concerning interpretation.

3. When it proves necessary to record that a certain fact is true, isacknowledged by a party to be true or is known by a party, either toprevent a future dispute, or on the other hand, to provide the basisfor a possible future claim, recitals can be the appropriate place.

4. Using the recitals to describe the circumstances, which have led upto the making of the contract, can be important for a party whowishes to challenge or amend its obligations under the contract ifthese circumstances change, governing law (or hardship clause)permitting.

5. A party who wishes to obtain performance of superior quality fromthe other party to the contract is likely to use the recitals to highlight the particular skills and attributes of the party who is to supply such performance.

88 Thought should be given to the important differences which exist in this regardbetween the various legal systems (see sU!Jr(J" pp. 88-91).


6. If negotiations leading up to the contract have been long and haveled to the exchange of a considerable number of pre-contractualdocuments, it may be appropriate to record it in the recitals, listing such documents. It would be appropriate to clarity-preferablyin the operative part of the contract89-the effects parties wish ordo not wish the pre-contractual documents to have.

7. If a contract is economically linked to other contracts, it may beuseful to state this in the recitals with the possible aim of providingan aid to interpretation. It may, however, be debatable whethersuch a statement creates any legal linkage between the differentcontracts; in any case, it is certainly preferable to state in the bodyof the contract whether such linkage exists or not.

8. The appropriate place for operative provisions is the body of thecontract and it is suggested that such provisions should not be contained in recitals (cf. above, recommendations 6 and 7) .90

Using recitals to summarize obligations, which are more fullydealt with in the body of the contract, should be avoided because ofthe possibility for dispute over interpretation in the event of inconsistency between the recitals and the relevant operative provisions.At the very least, the recitals should specify that the obligations,which they summarize, will be undertaken and performed in accordance with the provisions contained in the body of the contract.

By the same token, to avoid problems of interpretation, provisions giving the recitals the same force and effects as those contained in the body of the contract should be avoided. 91

9. Some provisions contained in recitals may be intended to supplyinformation to governmental or administrative bodies. Eventhough such provisions do not alter the basic philosophy of thecontract, there is nonetheless a danger that they may one day justity unexpected consequences, for example when ajudge or arbitrator is called upon to interpret the contract. Sending a side-lettermay be a precaution worth taking.

Recitals to contracts should receive more attention in legal literature thanhas been the case. In most countries, until recently, they were given almostno attention at all. Recitals are extremely Widespread and can have a multitude of legal effects.

89 For an identical view, d. E.A. Farnsworth, The Interpretation of InternationalContracts and the Use of Preambles, I.n.LJ., 2002, pp. 271-279.

90 Cf. P. Siviglia, Cornrnercial Agreernents, West, 1997, § 1.2. Compare, however, the contrary opinion of some Canadian and American authors, who, in the context of contractsgoverned by the Vienna Convention on International Sales of Goods, argue that anysuch provisions may as an alternative negotiation strategy be incorporated in the recitals(I.M. Klotz & J.A. Barrett, International Sales AgreeeTnents, La Haye, Kluwer LawInternational, 1998, pp. 46-49).

91 Compare R. Christou, of}. cil., p. 5.

CHAPTER 3

INTERPRETATION CLAUSES

I. WORKING METHOD

True to its objectives, the Working Group on International Contractslooked at interpretation clauses in international commercial contracts fromthe perspective of international contract draftsmen. On the basis of discussions and analyses of sample clauses provided by its members1 working

1 Also, the following interpretation clauses contained in international instrumentsmay be mentioned:

Articles 2 and 26 of the ICC Model Commercial Agency Contract, ICCPublication No. 644, Paris, ICC Publishing, 2002;

Articles 2 and 26 of the ICC Model Distributorship Contract, ICCPublication No. 646, Paris, ICC Publishing, 2002;

Article 1.1, 1.3, 1.4 and 1.5 of the ICC Model International Sale Contract,ICC Publication No. 556, Paris, ICC Publishing, 1997;

Articles 1 and 2 of the ICC Occasional Intermediary Contract, ICCPublication No. 619, Paris, ICC Publishing, 2000;

Rules 1.03, 1.09 and 1.11 International Standby Practices ISP 98, ICCPublication No. 590, Paris, ICC Publishing, 1998;

Chapter N-General remarks on drafting of the Legal Guide on DrawingUp International Contracts for the Construction of Industrial Works,UNCITRAL, U.N. Sales No. E.87.Y.I0, documentA/CN.9/SERB/2, 1988,pp.46-49;

Chapter N-General remarks on drafting of the Legal Guide onInternational Countertrade Transactions, UNCITRAL, U.N. Sales No.E.93.V.7, documentA/CN.9/SERB/3, 1993,46-49 and 51;

Articles 2.1, 14.2 and 14.4 of the European Model EDI Agreement, seeCommission Recommendation 94/820 of October 19, 1994 relating to thelegal aspects of electronic data interchange, OJ L. 338 of December 28,1994, pp. 98-117;

Clauses 1, 2 and 36 of the Client/Consultant Model Services AgreementThe vVhite Book, FIDIC, Lausanne, second edition, 1991; Conditions ofContract for Electrical and Mechanical Works-The Yellow Book, FIDIC,Lausanne, 3rd edition 1988 (clauses 1.1-1.3 and 5.1-5.4); Conditions ofContract for Works of Civil Engineering Construction-The Red Book,FIDIC, Lausanne, 4th 1989 (clauses 1.1-1.4 and 5.1-5.2);

Guide to the use of FIDIC's Sub-Consultancy and Joint Venture (Consortium) Agreements, FIDIC, Lausanne, 1994 (clauses 1.1-1.2 and 2.3-2.5 ofthe Sub-Consultancy Agreement and clauses 1.1-1.2, 11 and 21 of the Joint

103


in legal or contract departments of companies or working in private practice, general trends and problems regarding these clauses were observed.

An analytical way of describing interpretation clauses is used since thishas the advantage that the various elements of these clauses are emphasized and are given extensive attention. The disadvantage is that these elements are too much isolated from one another and that their intrinsic linksare insufficiently stressed. To fully understand interpretation clauses, oneshould seek an overall perspective including their various elements, theircontext, the applicable law and the factual background of the circumstances in which these clauses have been or are to be used. The analyticalapproach also has the disadvantage that the breaking down of interpretation clauses into 12 different categories (see Section III) may pay insufficient attention to their inter-relationships. The analytical method has,however, the advantage that the various interpretation mechanisms are better identified and described by emphasizing their different features.However, this approach isolates the various aspects of interpretation clausesfrom one another and, therefore, sketches only an incomplete picturesince many interpretation clauses bring together various elements. For thatreason, the examples cited hereafter should not be seen as sample interpretation clauses but are used only to illustrate the various elements thathave been found in this study.

Attempts to classifY interpretation clauses (see Section III) may createan impression that all interpretation clauses fall within one of these categories. Classification only seeks a better grasp of the wide variety of interpretation clauses that were encountered during the project and to providean outline of the options available to contracting parties; it cannot be allinclusive.

Some interpretation clauses in international commercial contractstend to be standardized to a large extent; their contents and wordings areoften similar. Such clauses may be characterized as boilerplate clauses that arecopied from one contract to another not only within the same company orlaw firm but also across the legal profession and across borders. The degree

Venture (Consortium Agreement); Conditions of Subcontract for works ofCivil Engineering Construction, FIDIC, Lausanne, 1994, 1st edition (clauses1.1-1.4, 3.1 and 3.4); Conditions of Contract for Design-Build andTurnkey-The Orange Book, FIDIC, Lausanne, 1st edition, 1995 (clauses1.1-1.6). In relation to the FIDIC Conditions, one should also note thepublication by FIDIC at the end of 1999 of four new standard forms of contract: (1) the Short Form of Contract; (2) Conditions of Contract for EPC("Engineer, Procure, Construct") Turnkey Projects; (3) Conditions ofContract for Plant and Design-Build; and (4) Conditions of Contract forConstruction (Lausanne, FIDIC, 1st edition, 1999). Some provisions of theold FIDIC conditions are cited in this chapter as examples only.

Interpretation Clauses • 105

of standardization of some interpretation clauses is comparable to someother contract clauses (e.g., assignment clauses2). This may be explainedby the fact that interpretation clauses are much less tailor-made than someother contract clauses that are related to the core of the contract.3

Interpretation clauses are often standard terms incorporated at the beginning or the end of contracts and not the subject of negotiations betweenthe parties. Another reason for the standardization of interpretationclauses may be the influence of Anglo-American drafting techniques forinternational contracts. Often used by u.s. or U.K. law firms and companies, these clauses appear in contracts where parties from the United Statesor the United Kingdom are involved or where U.S. or U.K. law firms wereretained. Sometimes, these sophisticated clauses are considered as the stateof the art of contract drafting and are used also where the United States orthe United Kingdom are not involved, for instance if English is the negotiation and contract language.

II. DIFFERENT CONTRACT INTERPRETATION MODELS

Before embarking on an analysis of interpretation clauses, a preliminary issue should be addressed as to the view different legal systems anduniform law take as to the interpretation of contracts concerning somebasic principles of contract law such as autonomy of the parties, interference by courts in contractually binding instruments and standards of goodfaith, fair dealing, reasonableness and equity.4 The following issues need tobe addressed:

1. What is the contractual content upon which the parties have agreedand how is any such content to be determined in cases where oneparty alleges that there are terms other than the written terms ofthe contract which add to, vary or contradict these terms;

2. How is any such content to be construed if it leads to differentinterpretations by the parties owing to ambiguities;

3. Are obligations other than those agreed upon by the parties readinto the contract and which techniques are used to that effect;

4. How are gaps in the contractual regulation dealt with;

2 See Chapter 11, pp. 537-538.

3 For instance termination clauses, see Chapter 12.

1 In common law countries, principles of contract interpretation have been developed by case law. In the United States, there is also the impact of the UniformCommercial Code. In civil law countries, codified interpretation rules are the startingpoint of the analysis. By way of examples, one may cite Articles 1156-1164 of the Frenchand Belgian Civil Codes, Articles 2 and 248 of Book 6 of the Dutch Civil Code, Articles1364-1371 of the Italian Codice Civile, Sections 133, 157 and 242 of the German CivilCode, Article 2 of the Swiss Civil Code and Article 18 of the Swiss Code of Obligations.


5. Are contracts immutable or adaptable in case of changed circumstances; and

6. Are contractual rights to be enforced rigidly or are they mechanisms to correct the exercise of those rights.

Furthermore, these basic contract law issues should not only be analyzed from the mere perspective of substantive law but should also beaddressed from an evidence angle. As will become clear from the analysisbelow (see Section II.B), evidence issues may have a bearing upon substantive contract law. This chapter will first discuss the substantive issuesand thereafter the impact of evidence law on substantive law.

A. Substantive Law

When solving basic substantive contract issues, one might first draw adistinction among the dispute settlement methods chosen by the parties.The application of contract law rules may indeed differ between mediation(or other forms of alternative dispute settlement), arbitration and court litigation. In the first case, the amicable settlement of the dispute governs,and the parties may, often with the support of a mediator who cannot render binding opinions, depart from contract law rules in order to terminatea dispute on the basis of the terms of the settlement on which they agree.

In arbitration, particularly in international commercial arbitration,legal standards control,S but one should not underestimate the importanceof psychological and practical considerations in the adjudicatory process. (1

In any event, one notes an obvious tendency that commercial arbitrators,because of the contractual nature of arbitration, refuse to depart from thecontract terms and are not readily inclined to derogate from contractualprovisions on the basis of fairness. This is confirmed by many arbitrationslaws, uniform texts and arbitration rules, which explicitly impose that arbitrators should pay due regard to contract clauses. 7 On the other hand, thediscretion offered to arbitrators under recent arbitration laws and the factthat arbitral awards are not reviewed on their merits explains why arbitrators obliged to apply rules of law (as opposed to amiable composition) havemore flexibity in interpreting contracts than domestic courts have. Thesepossibilities for arbitral adjudication (lex mercatoriaS) will, as such, not be

5 See for instance, M.H. Maleville, Pratique arbitrale de l'interpretation des contrats commerciaux internationaux, R.D.A.I./I.B.LJ 1999, pp. 100-110.

6 F. De Ly, Uniform commercial law and international self-regulation, in TheUn~fir:alion q! Inlernalional Cornrnercial Law, F. Ferrari, (ed.), Baden-Baden, Nomos Verlag,1998,60-61; also published in 11 Dir; Corn. Int., 1997, pp. 519-547.

7 See F. De Ly, International Business loa/L! and loex Mercatoria, Amsterdam, NorthHolland, 1992, pp. 117-120.

1-\ On this third approach to lex rnen;aloria, see F. De Ly, Lex Mercatoria (New Law


able to completely settle interpretation disputes on the basis of nonnational principles such as pacta sunt servanda and, therefore, disputesbetween companies in relation to interpretation will generally have to besolved by recourse to national law.9

Secondly, attitudes towards freedom of the parties, application of objective standards of conduct and court intervention vary significantly betweendifferent jurisdictions as to their theoretical assumptions and basic ideas,but less so in relation to practical applications. 10 One of the problems causing differences and confusion is related to the proper definition of the concept of interpretation. In some countries interpretation is the processwhereby the common intention of the parties is determined (subjective theory). In other countries, interpretation is the process of determining therights and obligations of the parties, primarily if there are ambiguities, contradictions or gaps within the contents of the contract (objective theory).l1This process takes place based on a number of factors such as good faithand fair dealing, state of the art, trade usages, course of dealing or industry standards, including but not limited to the parties' common intentions.Under the objective theory, the subjective theory is absorbed and at thesame time the parties' common intentions are reduced to only one factorwhen determining the contents of the contract. The major issue under thattheory is then to establish when and to what extent these intentions stillhave a role to play including their effect on objective standards of adjudication. Finally, there is a third group of countries where a sharp distinctionis made between the common intention of the parties and objective rulesfor contract interpretation (mixed theory). If the common intention can beestablished, that intention will prevail. Objective interpretation will comeinto play if and to the extent that the common intention cannot be determined, but then there is no longer any room for what the parties mighthave intended had they envisaged the problem.

In civil law countries, the starting point is freedom of contract and thesubjective intent of the parties (subjective theory). Contracts are formed bythe meeting of the parties' minds, and contract interpretation is aimed atdiscovering what the parties meant when concluding the contract or at the

Merchant): Globalization and International Self-Regulation, in Hales and Networks, V.Gessner, (ed.), Hart, Oxford, 2001, pp. 159-188; also published in 14 DiJ; Corn. Int. 2000,pp.555-590.

9 This may be different in State contract-litigation where States and public enterprises are involved.

10 See H. Katz, Europiiisches Vertragsrecht, I, Tubingen, Mohr, 1996, pp. 165-173, translated in H. Katz, Interpretation of Contracts, in Towards a Huropean Civil Code, A. Hartkamp,et al. (eds.), 2nd edition, The Hague, Kluwer Law International, 1998, pp. 267-283.

11 H. Katz, op. cit., 163.


least what they would have agreed upon if the problem to be solved hadcrossed their minds.

This position is still to a large extent to be found in French contractlaw theory12 and in the legal principles developed by the French SupremeCourt. 13 However, in French legal practice, results are often achieved thatare similar to those in other civil law systems although the theoretical paradigms of contract law have not been changed. This is particularly so inrelation to objective standards of fair dealing that are important in Frenchcontract law but are phrased and hidden under a different terminology.For instance, case law of the French Supreme Court-on the basis ofArticle 1134 of the French Civil Code (party autonomy)-has extendedreview as to the interpretation of contracts 11 to those contractual provisionsthat are clear and precise (clauses claires et pricises) .15 In those cases, lowercourts can be reversed if they did not apply these contractual clauses(denaturation). Thus, the Supreme Court accepted limited review in contract interpretation issues based on the need for legal certainty resulting ina strict enforcement by lower courts of contract provisions on the basis ofa strict reading of contracts thereby excluding arguments as to the contracts not complying with what the parties really intended. 16 Also, Frenchcontract law recognizes a lot of contractual obligations that are not explicitly stated in the contract but are read into it. On the basis of Article 1135of the Civil Code, the scope of contractual commitments is not limited tothe express contract terms but also extends to all those consequences thatmust be considered to be part of the contract by virtue of statute, customand fair dealing (equitej. French case law and scholars have, in a very pragmatic way, incorporated many obligations into contracts by means of thistechnique (such as the obligation to inform, to give advice, to warn or togive implied warranties) without challenging the traditional party autonomy paradigm. 17 Similarly, a general principle of law, under which no one

12 Gradually, French contract law theory is exploring the possibilities and limits ofgood faith and fair dealing and equity as general principles of contract law, see Y Picod,Le devoir de loyaute dans l'execution du contrat, Paris, L.G.DJ., 1989,254 pp.; C. Albiges, Del'equite en droit prive, Paris, L.G.DJ., 2000, 383 pp.; B.Jaluzot, I~a bonneJoi dans les contmts,Elude r:omjJaralive de dmilfraru;ais, allemand eljaj)()nais, Paris, Dalloz, 2001, 605 pp.

13 See B. Mercadal, Contmts et droits de l'entreprise, Paris, Francis Lefebvre, 2002, pp.321-325.

11 In principle, review is excluded because interpretation of contracts is a matter offact-finding and not a legal issue.

15 See M.H. Maleville, L'interpr-etation des contmts d'assUJance terrestre, Paris, L.G.DJ.,1996, pp. 94-100 and pp. 117-122.

16 See on all these aspects M.H. Maleville, PraliqLle de l'inlerfJretalion des r:onlrals, Etudejurisprudentielle, Rauen, Publications de l'Universite de Rauen, 1991, 319 pp.

17 See, on the basis of a comparison with German law, A. Rieg, I~e role de la volontedans l'actejuridique en droit civilfranr;ais et allemand, Paris, L.G.DJ., 1961,589 pp.


may abuse his legal rights, has easily found its way in to contract law inorder to enable courts to interfere with contractual cases where evidentfraud or manifest abuse were present (abus de droit) .18 In cases of changedcircumstances, however, French contract law has not developed (imprevisian). Here, in civil and commercial contracts, the principle is that contracts are binding and immutable even when significant changes occurredafter the conclusion of the contract that dramatically affected the contract.Although the maxim clausula rebus sic stantibus had been accepted at thebeginning of the last century for administrative contracts, this principle hasnot been extended to civil and commercial contracts. Thus, the contracting parties must provide for hardship clauses if they want contracts to bemodified on the basis of changed circumstances.19

In Belgium, contract law is very similar to French law except that thetheories of the clauses clair-es et pricises and denaturation have not developedin the same way as in France. In this respect, the practice of review by theBelgian Supreme Court is more limited and extends only to review whetherthe trial judge gave an acceptable motivation for his decision. In thatrespect, interpretation may not result in conclusions that are neither suppported by the agreement in writing nor by the real intentions of the parties. 20 Moreover, in commercial transactions (between merchants or in anaction against a merchant), evidence contradicting the written agreementmay be brought since evidence in those transactions is free and not subjectto the restrictive provisions of the Civil Code. Also, abuse of contractualrights is not based on a general principle of law but rather on a provisionof contract law stating that contracts are to be performed in good faith(Article 1134, third paragraph Belgian Civil Code). However, the fact thatthe basis for abuses is different from the French one does not lead to substantially different consequences. Finally, it is to be noted that the Dutchspeaking scholars primarily influenced by Dutch law are proposing toacknowledge the relevance of objective standards of conduct in contractinterpretation, filling of gaps and restrictions regarding the attitudes ofcontracting parties in exercising their contractual rights. 21

IS On abuse and contract law, see Ph. Stoffel-Munck, L'abus dans le contmt, Paris,L.G.DJ., 2000. Absent abuse, contractual rights are to be enforced and lack of fairness(Cq'Llilli) is not a reason to refuse to do so (M.H. Maleville, 0fl. cil., 93). On abuse of contractual rights and equity, see C. Albiges, De l'iquili en droil flrivi, Paris, L.G.DJ., 2000,383 pp.

19 See Chapter 9.

20 R. Kruithof, in R. Kruithof, H. Bocken, F. De Ly, & B. De Temmennan, Ovenichlvan rechtspmak (1981-1992), Verbintenissen, Tijdschrift voor Privaatrecht, 1994, pp.448-449.

21 See F. De Ly, De lex mercatoria, Antwerp, Maklu, 1989, pp. 287-289. As in France,one also witnesses a development with Belgian French-speaking authors towards a moreobjective contract law theory, see J.F. Romain, ThiOJie critique du principe de bonne foi endroit prive, Brussels, Bruylant, 2000, pp. 797-959.


During the meetings of the Working Group, it was reported that theabove-mentioned position of French and Belgian law is also found to alarge extent in Italy, Spain, Portugal and Brazil.

The theoretical position is different in Germany where, in the 1920s,courts intervened in contract cases in three major respects based on thenotion of good faith and fair dealing (Section 242 of the German CivilCode-Treu und Glauben, objective theory). First, courts read new obligationsinto contracts and, thus, have supplemented what the parties had alreadyprovided (Erganzungsfunktion). Secondly, good faith may be used to interfere with contract terms and prohibit the exercise of contractual rights ifthis conflicts with fair dealing (Schrankenfunktion). Finally, contracts may beadapted to new circumstances by courts as a result of a significant changein the circumstances that originally led to the conclusion of the contract(Korrekturfunktion) .

Similar developments took place in The Netherlands22 where, in thenew Civil Code, good faith was re-baptized as reasonableness and fairnessin order to express much better the reference to an objective standard ofconduct and not to a subjective intention of the mind such as honesty infact. Therefore, good faith as a subjective element was distinguished fromreasonableness and fairness that, under the new Civil Code introduced forcontract law on January 1, 1992, is a standard under which judges mayreview contractual conduct, supplement contract terms and revise contracts(for the latter see Article 258, Book 6 Dutch Civil Code).

Influences of the objective theory are also to be found in Switzerlandon the basis of Article 2 (1) of the Civil Code,23 particularly under influences from Germany and through the German-speaking scholars. However,it seems that Switzerland has an interesting mixture of subjective and objective models since, first, an inquiry will be made as to the real intentions ofthe parties and subsequently-if no clear common intention can be established-objective standards will be applied. The first stage of the inquiry isfactual and without review by the Swiss Supreme Court, whereas the secondstage of the analysis is deemed to be of a legal nature and is reviewable.The Swiss position has the advantage that its two-stage approach not onlyreconciles both the subjective and objective models but also gives a practical solution as to how this reconciliation is to be effected.24

22 See J. Van Dunne, Verbintenissenrecht, Part 1, Deventer, Kluwer, 2001, pp. 137-236.

23 See E.M. Belser, Die Auslegung des Vertrages, in L'euro!Jeanisation du droit !Jrive,Fribourg, Editions universitaires, 1998, pp. 237-267.

24 A similar approach is also found in Article 4.1 of the Unidroit Principles andArticle 5:101 of the Principles of European Contract Law. Egyptian law also seems to takethis two-tier approach.


The situation in the Germanic civil law countries,25 has undoubtedly butsubtly influenced the United States,26 particularly the Uniform CommercialCode. Through Karl Llewellyn, Chief Reporter for the Uniform CommercialCode, the UCC borrowed from German law notions such as good faith orfair dealing. 27 The theoretical ramifications of any such borrowings have,however, insufficiently been analyzed,28 and no lessons have yet been drawnfrom any such influence. Examples of objective standards under which contracts may be reviewed include UCC Section 2-302 (unconscionable contracts or clauses), Section 2-305 (open price contracts) or Section 2-306 (1)(output and requirement contracts).29 In accordance with UCC Section1-102(3), the standard of good faith may not be varied by agreement, butdoes not exclude that the parties determine reasonable standards againstwhich to measure the performance of the obligation.

Uniform law texts have been more ambiguous about their approach tofreedom of contract and contract interpretation. Within the EuropeanUnion, general contract law has hardly been the subject of directives exceptfor the Commercial Agency Directive30 and therefore no generalizationscan be made at this point. Also, specific directives in the fields of consumerprotection (such as the Unfair Contract Terms Directive31 ) or employmentcontracts have not yet sufficiently matured to draw conclusions as to general positive contract law principles within the European Union. On aworldwide scale, there is primarily the U.N. Convention on the International Sale of Goods (CISG) that in view of the number of contractingstates and its practical relevance, should be taken into account. In thisrespect, CISG is tainted by compromises between hard and fast rules

25 For the purposes of this analysis, Switzerland and The Netherlands may be characterized as belonging to the Germanic legal tradition.

26 In relation to a recent similar development in Australia, inspired by U.S. law andthe Unidroit Principles, see A. Mugasha, Evolving Standards of Conduct (Fiduciary Duty,Good Faith and Reasonableness) and Commercial Certainty in Multi-Lender Contracts,Wayne L. Rev. 2000, pp. 1789-1824.

27 A. Farnsworth, Duties of Good Faith and Fair Dealing under the UnidroitPrinciples, Relevant International Conventions, and National Law, 'Put. j. Int. Comp. L1994, pp. 51-52.

2S Cf. A. Farnsworth, loco cit., pp. 59-61.

29 For the latter, see J. Gordley, An American perspective on the Unidroit Principles,Saggi, Conferenze e Seminari, Rome, Centro di studi e richerche di diritto comparato estraniero, 1996, p. 3.

30 Directive 86/653 of Decembel' 18, 1986 on the approximation of the laws of theMember States regarding independent commercial agents, OJ L. 382 of December 31,1986, pp. 17-21.

31 Directive 93/13 of April 5, 1993 on unfair contract terms in consumer contracts,OJ L. 95 of April 21, 1993, pp. 29-34.


regarding the binding character of sales and some open-ended rulesregarding contract interpretation as is the case with regard to the legal status of usages (Articles 8(3) and 9 CISG) , good faith (Article 7(1) CISG) oropen price contracts (Articles 14 and 55 CISG).

The Germanic and U.S.-UCC approaches to contract law have also influenced the Unidroit Principles of International Commercial Contracts32 aswell as the Principles of European Contract Law (hereafter referred to as thePECL) .33 These Restatement-type efforts34 have been based on comparative lawanalysis and have finally opted for quasi-legislative techniques much moreinspired by the style and notions of the Germanic legal tradition and of theUCC than of the Romanic, English or other legal traditions.

Finally, in England contract law interpretation has, to a large extent,remained focused on both freedom of contract and literal exegetic interpretation, provided the latter does not lead to absurd consequences.35 Withregard to the former, the situation is different from all other legal systemsdiscussed above. Under English contract law,judges have refused to admit

32 Principles of International Cmn'rnercial Contracts, Rome, Unidroit, 2004, 385 pp.; fora commentary with further references, see MJ. Bonell, An International Restatement ofContract I"aw, The Unidroit Principles of International Cmnrnercial Contracts, Irvington N.Y,Transnational, 2nd ed. 1997, 572 pp.

The influence of an objective theory of contract law may be seen in Articles 1.7 (acting in good faith and fair dealing), 2.1.15 (negotiations in bad faith), 3.5 (mistake), 3.10(gross disparity), 4.8 (addition of contract terms based on good faith and fair dealing)and 7.1.6 (exemption clauses). For a discussion, see A. Farnsworth, loc. cit, pp. 47-63.

In relation to interpretation, Article 4.1 provides that a contract must be interpretedaccording to the common intentions of the parties and, absent any such intentions, inaccordance with the meaning that reasonable persons of the same kind as the partieswould give it in the same circumstances (see also Articles 4.2 and 4.3).

33 Commission on European Contract Law, The Principles ofEuropean Contract Law,Parts I and II, Lando, O. & Beale, H. (eds.), The Hague, Kluwer Law International, 2000,561 pp. The influence of good faith is clear from Articles 1:102(1), 1:106(1), 1:201(1),1:302,2:301 and 6:102. The influence of the objective theory is clear in Article 5:101 (3)which contains language similar to that of the Unidroit Principles.

34 There are, however, differences with the U.S. Restatements as to the organizationspromoting these texts and the scope of these efforts. In this respect, the U.S.Restatements are based on common foundations and principles within the U.S. legal system which is not or to a lesser extent the case on a worldwide scale regarding theUnidroit Principles or within the European Union regarding the PECL. For a criticismregarding these Restatement-like efforts, see C. Kessedjian, Un exercice de renovation dessources du droit des contrats du cornrnerce international: les Principes proposes par l'Unidroit,R.C.D.I.P., 1995, pp. 641-670.

35 See K. Lewison, The Interpretation of Contracts, 2nd ed., London, Sweet & Maxwell,1997, 460 pp.; M. Anderson, Drafting and Negotiating Cmnrnercial Contracts, London,Butterworths, 1997, pp. 87-88; A.GJ. Berg, Drafting Commercial Agreements, London,Butterworths, 1991, pp. 73-80.


that they imposed additional obligations on contracting parties because itwas fair or reasonable to do so. Rather, contract supplementation has beenbased on the doctrine of implied terms,3G which-apart from implications bylaw or as a matter of necessity-hides in hypothetical party-intent termsthat the judges are imposing additional contract terms because-in theiropinion-this solution is reasonable and fair under the circumstances.Also, the English judiciary has been reluctant to intervene in contractualrelations and to derogate from contract terms on the basis of notions suchas good faith or fair dealing. Finally, contracts cannot be revised underEnglish law in the case of changed circumstances, which make it more difficult for one of the parties to perform except if the restrictive requirements of the doctrine of fTustration are met. In this respect, English law ismore predictable than contract law in other systems. Unlike the civil lawcountries, English contract law does not interpret contracts by looking toparty intent but rather to what the parties have expressed and writtendown. Contracts are primarily interpreted on the basis of an exegetic reading of written instruments. This literalist position may be changing towardsa more objective (commercially oriented, contextual and purposeful) perspective37 as appears from recent case law of the House of Lords,38 butthere is still opposition against this recent development within the legalprofession and even within the House of Lords. In any event, the traditionof literal interpretation of contracts is typically English and is not found inthe other jurisdictions under discussion. On the other hand, like France byvirtue of the theory of clear and precise clauses, English judges will not proceed to interpretation of unambiguous clauses on the basis of the plainmeaning rule.

From the foregoing analysis, it appears that national legal systems, uniform law and international commercial arbitration may take differentapproaches to contract interpretation. These variances are often due to different assumptions but do not always result in very big differences in practical solutions. To this, there are some exceptions such as hardship 39 or the

36 The basic House of Lords case on implied terms is Liverpool City Coucil v. Irwin[1977] A.c. 239.

37 G. McMeel, The Rise of Commercial Construction in Contract Law, Lloyd\' Mar:Cmn. L.Q. 1998, pp. 382-392.

3S ICS v West Bromwich Building Society [1998] 1 All E.R. 98 (HL). In this case, LordHoffman for the majority held that the meaning of the words of a contract is not thesame as the meaning that a document would convey to a reasonable man. In this respect,his Lordship stated that interpretation is the ascertainment of the meaning of a document to a reasonable person having all the background knowledge that would reasonably have been available to the parties in the situation in which they were at the time ofthe contract.

39 See infra, Chapter 9.


somewhat still isolated position of English contract law. In analyzing anddrafting interpretation clauses, these different approaches must always bekept in mind.

B. Evidence

So far, the comparative analysis dealt with substantive contract law.However, interpretation of contracts also involves problems of evidence.The problem of contract construction cannot be limited to the effects tobe given by judges and arbitrators to contracts but also encompasses thequestion as to how the contracting parties should prove the contents oftheir contract. Since the international contracts, which were the object ofthis research project, were written contracts, the issue that arises is whetherand to what extent contracting parties may prove the contents of their contract by relying on written evidence other than the written contract and onother evidence such as witness testimony. In that respect, a further distinction is to be made between admissible evidence regarding (1) ambiguitiesarising from the contract; (2) gaps to be filled where the written contractdoes not provide for an answer to the problem at hand because that problem is not dealt with in the contract; and (3) terms agreed upon by the parties other than the terms of the written contract that add to, vary orcontradict these latter terms.

Rules on evidence may well be relevant here in order to determine therole of contracting parties,judges and arbitrators to contract interpretation. In international commercial arbitration, recent arbitration laws haveintroduced liberal rules regarding evidence on issues such as burden ofproof, means of evidence and assessment of evidence. Injurisdictions having these liberal rules, the domestic rules for court litigation regarding evidence of the place of arbitration will not be applicable to the arbitration,and the liberal rules will apply. However, the substantive law governing thecontract may still have an impact regarding the question whether and towhat extent some evidence is admissible. 40

Injurisdictions having less liberal arbitration statutes or in domesticcourt litigation, domestic procedural rules on evidence will be much moreimportant. In that respect, a distinction must be dawn between civil lawcountries having liberal rules, civil law countries having more restrictiverules and common law jurisdictions. First, France, Belgium and TheNetherlands have rules on evidence that are generally quite liberal and willnot have a substantial impact on interpretation clauses. For France andBelgium with a distinction between general private law and commercial law(droit civil et droit commercial), the general principle-subject to exceptions-

40 As to conflict of laws issues, see Th. Grout, La preuve en droit international prive, Aixen-Provence, Presses universitaires d'Aix-Marseille, 2000, 422 pp.


is that there are no strict rules on evidence in commercial matters (asopposed to the strict rules in droit civil), and that evidence is free. Thus, forcommercial contracts, the parties may prove, with any means of evidence,the facts on which they rely, and the judge has the discretion to admit orrefuse any such evidence. For commercial contract interpretation, thisimplies that the parties may-without limits-prove those facts that supporttheir respective positions regarding the scope and effects to be given to thecontract when ambiguities, gaps or contradictions arise. This evidence isnot limited to the written contract, but also extrinsic evidence may be usedincluding other written evidence or witness testimony. Contrary to Article1341, first paragraph of the Civil Code pursuant to which one cannotaccept evidence against or supplemental to a contract in writing,41 any suchevidence is admissible in commercial matters.42 However, statutory rules onevidence are not considered mandatory and, thus, party autonomy appliesto the choice of evidence. Case law has accepted that the parties may conclude evidence agreements43 that in commercial matters may restrict theliberal provisions of the law. Under the law of these jurisdictions, rules onevidence do not significantly modifY the substantive law regarding contractinterpretation because either the legal rules are very liberal or contractualevidence clauses are deemed valid and enforceable. A similar situationexists in The Netherlands under new rules of evidence introduced in 1988in the Code of Civil Procedure providing for liberalism and flexibility. Thevalidity of evidence agreements is expressly in these rules regarding rightsprivate parties may prevail upon (Article 153 Code of Civil Procedure).

Other civil law jurisdictions have more restrictive rules on evidence; aposition different from French, Belgian and Dutch law positions is foundin Italy. There, evidence agreements must be fine-tuned to correspond withsubstantive contract law, and an agreement excluding some evidence couldnot prevent judges from looking for the real intention of the parties(Article 1362 Codice Civile). In Germany, there are also liberal rules on evidence for proving contract content, but evidence agreements are only validin relation to the burden of proof but not regarding means of evidence or

11 The French provision provides as follows:

"II doit etre passe acte devant notaires ou sous signatures privees de touteschoses excedant une somme ou valeur fixee par decret, meme pour depotsvolontaires, et il n'est re~u aucune preuve par temoins contre et outre Iecontenu aux actes, ni sur ce qui serait allegue avoir ete dit avant, lors oudepuis les actes, encore qu'il s'agisse d'une somme ou valeur moindre."

The Belgian provision has a similar wording.

12 For Belgium, see X. Dieux, La preuve en droit commercial beIge, Revue de droitcornrnen:ial belge, 1986, pp. 85-86 and 93-94.

43 Casso November 8, 1989, Bull. Casso 1989, No. 342, D. 1990, 369; see also J.M.Mousseron, Technique contractuelle, 2nd eel., Paris, Francis Lefebvre, 1999, pp. 687-694.


assessment of evidence.44 Special rules apply to general conditions whereprotective rules, adopted in the Statute on General Conditions (Section 11No. 15 AGBG-Gesetz iiber die Allgemeinen Geschaftsbedingungen) andrecodified in 2001 in Section 309(12) BGB, limit the possibilities to haveclauses in general conditions reversing or changing the burden of proof.These rules may be applicable in commercial transactions providedGerman law is used in the contract. Finally, there is Switzerland where themajority opinion holds positions that are similar to those in Germany.Accordingly, evidence agreements reversing the burden of proof are binding based on the non-mandatory character of Article 8 of the Code ofObligations with either party proving the facts on which it relies.Agreements covering means of evidence and the assessment of evidenceare considered ineffective since they restrict the freedom of the judiciaryto assess the evidence and of the parties to handle the evidence as theywish during the trial. However, one author has proposed to accept theenforceability of evidence agreements regarding the means of evidencesince these clauses do not directly interfere with the discretion ofjudgesregarding the assessment. 45

The common law on evidence is quite different from the law in civillaw countries. Rules on evidence are stricter and should be taken intoaccount when analyzing interpretation clauses. The crucial principle is theparol evidence rule that-unlike in civil lawjurisdictions-excludes some evidence if the contract is in writing. However, the scope of the parol evidencerule differs between common law jurisdictions. In England, the parol evidence rule is more flexible than in the United States. Under English law,the parol evidence rule attempts to provide legal certainty and, thus,excludes oral evidence or other evidence (such as drafts of contracts) establishing that there are other contractual terms than those contained in thewritten instruments. Under that rule, the parties cannot prove express contract terms that add to, vary or contradict written terms.16 There are some

44 Zoller, ZivilprozejJordnung, 20th ed., Cologne, Otto Schmidt Verlag, No. 32 vor §]28 ZPO, No. 23 vor § 284 ZPO; Haurnbach/I~auterbach/ Albers/Hartrnann Zivilproze[3ordnung,56th edition, Munich, Beck, Nos. 6-7 Anh § 286 ZPO; for a critical view of this opinionrejecting the admissibility of means of evidence agreements, see G. Wagner, PmzejhJerlriige,Tubingen, Mohr, 1998, pp. 685-691.

15 On all these aspects, see C. Chappuis, Validite d'une "entire agreement clause" entant que convention de procedure, unpublished report, March 17, 2000, 7 pp. Theauthor cited by Chappuis taking the Swiss minority view is U. Kaufmann, FreieBeweisururdigungirn BundespTivatrecht und in ausgewahlten Zivilprozessordnungen, Ztirich,1986, pp. 109-111.

46 Under Scottish law, the situation is different. Under Section 1 of the Contract(Scotland) Act 1997, the parol evidence rule does not apply so that extrinsic evidence ispermissible unless the parties expressly have declared that the contract is the completeexpression of their agreement (see H.L. MacQueen, M.A. Hogg, & P. Hood, Muddling


exceptions to the rule. For our analysis, the most important exceptions arethat a party may still prove that the written contract did not constitute theentire contract between the parties or that a different collateral agreementhad been concluded between the parties. Both exceptions make the parolevidence rule much more open-ended and flexible than would appear onfirst reading. Still, there is a gradual difference with civil law jurisdictionsto be taken into consideration when analyzing contract interpretation ina comparative setting. The parol evidence rule does not attempt to excludeevidence that purports to clarify ambiguities. Nor does it prevent the reading of implied terms into the contract since the rule only applies to expressterms not recorded in writing.17

Because of the intricacies of the parol evidence rule, parties ofteninsert entire agreement clauses into their contracts that attempt to establishthat the contract in writing expresses their entire agreement and thatexclude parol evidence of any additional or contradicting term. Theseclauses add to the presumption that a written contract is deemed to expressthe parties' entire agreement and makes that presumption irrefutable.Therefore, the entire agreement clause establishes the contract in writingto be final excluding any additional or contradicting express terms.

The situation in the United States is more complicated than inEngland. First, the parol evidence rule applies in the United States if theparties adopted a written contract as a final expression of their agreement.If so, prior or contemperaneous terms are deemed to have been completely integrated into the written contract and the parol evidence rulethen comes into play to exclude evidence showing that there are otherterms (both contradicting or additional terms) than those expressed in thewritten contract (complete integration). Apart from complete integration,there is also the possibility of partial or incomplete integration if the contract is the final expresssion of only a part of the contract. The parol evidence rule then excludes evidence attempting to establish the existence ofcontradicting terms but would admit extrinsic evidence of additional terms.In view of the differences regarding the legal effects to be given to complete or partial integration, the key issue is to determine whether one is fac-

through? Legal Responses to E-Curnmerce from the Perspective of a Mixed System, Molengrafica,Europees Privaatrecht, Lelystad, Vermande, 1998, p. 218). In England, the LawCommission scrutinized the parol evidence rule in 1986 but concluded that it was nota rule of law to be abrogated since it was but a circular statement excluding evidence ifit was proven that the written contract contained all the express terms of the contract(see]. Beatson, Anson's Law of Contract, Oxford University Press, 1998, 27th ed., p. 131).

17 For all these elements, see K. Lewison, The interpretation ofcontracts, London, Sweet& Maxwell, 2nd ed., 1997, pp. 45-50. For all the exceptions to the parol evidence rule,see C.H. Treitel, The Law of Conlnu;l, London, Sweet & Maxwell, 1999, 10th ed., pp.175-183.


ing complete or partial integration if the written contract does not say so.Under an older restrictive view proposed by Williston and adopted in theFirst Restatement of Contracts and still followed by a minority of courts,extrinsic evidence can be admitted only if it appears on its face that thewritten contract is incomplete and the written contract has omitted a priorterm. The written contract is then deemed only to have partially integratedprior terms and additional prior terms may be proven by extrinsic evidence. Under the prevailing and more liberal view of Corbin, endorsed bythe Second Restatement of Contracts, by Section 2-202(b) of the UniformCommercial Code48 on sales and by the majority of courts, extrinsic evidence may be used to establish prior agreements, and the courts, on thebasis of that evidence, will determine whether the parties intended a written contract to be completely or partially integrated. Subsequently, thecourts will either exclude extrinsic evidence if the written contract is fullyintegrated or admit extrinsic evidence to prove additional terms if the written contract is partially integrated.49

In order to avoid the complications stemming from the parol evidencerule, the ulterior determination by courts of the complete or partial integration of the contract and the factual determination in this regard duringjury trial, contracting parties often insert integration or merger- clauses intotheir contracts. It seems that the term "entire agreement clauses" has developed more in England, whereas the Americans use the term "integrationclauses" or "merger clauses." These clauses provide for complete integration of prior and contemporaneous agreements and thereby attempt toexclude extrinsic evidence of additional and contradicting terms. Theseclauses will be analyzed below (see Section IILC.3). At this moment, it issufficient to state that under American law the parol evidence rule excludesevidence of terms contradicting the terms of the written contract, and,depending upon the presence of complete or partial integration, excludesor does not exclude evidence of additional terms. So far, we were dealingwith prior agreements (in writing or oral) or contemporeneous oral agreements that depart from the written contract or add terms to it and wherethe parol evidence rule may prohibit evidence. Now, the question ariseswhether implied terms imposed by law, by trade usage, by course of dealing or by course of performance are affected by the parol evidence rule.

18 This provision is currently under revision in the broader context of the revisionof Article 2 of the UCC on sales, see in this respect H. Gabriel, How International Is theSales Law of the United States?, Centro di studi e ricerche di diritto comparato estraniero, Saggi, conferenze e seminari, 34, Rome, 1999, 11-12.

19 See on all these elements, Farnsworth on Contracts, 2nd ed., Aspen Publishers Inc.,1998, II, pp. 215ff.; E.A. Farnsworth, The Interpretation ofInternational Contracts andthe Use of Preambles, I.B.LJ, 2002, pp. 272-275 and J. Gordley, An AmericanPerspective on the Unidroit Principles, Centro di studi e richerche di diritto comparatoe straniero, Saggi, conferenze e seminari 22, Rome, 1996, pp. 19-24.


Generally, gaps in the contract may be filled by means of these standards,and the parol evidence rule is not applicable to these instances since theysupplement the contract by operation of legal principles of contract interpretation and not through party incorporation that would need to beproven. However, courts in the United States are divided over the questionwhether the parol evidence rule would prohibit extrinsic evidence that theparties agreed to a term other than a term implied by law, trade usage,course of dealing or course of performance.50 The parol evidence rule doesnot exclude extrinsic evidence to explain the ambiguity on the basis ofprior or contemporaneous agreements. 51

Uniform law and particularly CISG do not contain specific evidenceprovisions. In any event, there is no parol evidence rule in CISG, and interpretation problems under this convention will be governed by its abovementioned principles on interpretation. However, there is still the problemhow to solve these interpretation problems in litigation in common lawjurisdictions that have adopted CISG and where the question ariseswhether the parol evidence rule applies to any such litigation. 52 Article2.1.17 of the Unidroit Principles and Article 2: 105 PECL have banned theparol evidence rule and allow extrinsic evidence to supplement or evencontradict a written contract. However, merger clauses may still purport tocorrect the operation of this rule, and statements or agreements may stillbe invoked to interpret the writing (see Section III.C.3).

By way of conclusion, one may say that under American law muchmore than under English law and contrary to European continental systems, rules on evidence to a large extent bear upon contract interpretation,especially as to contradicting and additional agreements but not so regarding the filling of gaps by law or in finding the solution to ambiguities.

III. ANALYSIS OF INTERPRETATION CLAUSES IN INTERNATIONAL CONTRACTS53

The empirical analysis of interpretation clauses will be limited tointernational commercial contracts and deals only with general problemsof contract law and obligations regarding interpretation. Special con-

50 J. Cordley, lor;. cil., pp. 19 and 22-23.

51 See Second Restatement of Contracts § 214.

52 See infra Section III.G3.

53 See M. Anderson, Drafting and Negolialing Cormnercial Conlnu;ls, London, Butterworths, 1997, pp. 75-121;J.M. Mousseron, Technique r:onlnu;luelle, 2nd ed., Paris, FrancisLefebvre, 1999, pp. 681-685; ACJ. Berg, DraJting Cmnmercial Agreements, London,Butterworths, 1991, pp. 2, 56-86, 165-169, 171-172; R. Christou, Boilerplate Practical Clauses,London, Financial Times Law & Tax, 2nd ed., 1995, pp. 10-31 and 179-187; D. Fosbrook,& A Laing, The A-Z of Conlfar;{ ClaLlses, London, Sweet & Maxwell, 1996, p. 519.


tracts, which, under the applicable law, may be affected by special considerations or governed by specific provisions (e.g., specific statutoryprovisions or special treatment in case law in the interpretation ofemployment contracts, consumer contracts:"i4 or insurance contracts),were not included in the analysis.

Interpretation clauses have developed in practice because the laws oninterpretation in manyjurisdictions are not mandatory. The interpretativerules found in the statutes, primarily in civil law countries based on Frenchlaw, as well as those developed in the common law are guidelines to helpjudges and arbitrators in interpreting contracts and generally were not conceived to form a basis for review by supreme courts in the context of procedures of cassation.55 This reluctant attitude by supreme courts to interferewith contract interpretation is often related to their position in the judiciary where they are not trial judges and, therefore, contract interpretationas a fact-determining process is largely left to lower courts. Thus, contractclauses dealing with interpretation issues will, as a matter of principle, beupheld and enforced by courts and arbitrators.

This perspective might differ in an objective contract law theory. Anindication is Section 1-102 (3) of the American UCC, which provides thatthe standard of good faith may not be varied by agreement but does notexclude that the parties determine reasonable standards against which tomeasure the performance of the obligation.56 Under any such objectiveperspective, good faith and fair dealing is a higher principle than theautonomy of the parties. Consequently, the parties cannot establish termsthat run contrary to good faith and fair dealing. It is, however, unclearwhether they might limit the scope of their contractual obligations tothose in the written contract and, thus, prevent that judges or arbitratorsimpose new obligations on the basis of good faith and fair dealing.57 Ithas already been emphasized that the objective theory has not yet solvedits intrinsic tension between objective standards of adjudication and theparties' intentions.

54 E.g., within the European Union, the Council Directive 93/13 of April 5, 1993regarding unfair contract terms in consumer contracts, OJ L. 95, April 24, 1993, pp.29-34.

55 The case law of the French Supreme Court regarding clauses claires el fner;ises is anexception to this rule (see supra, Section II).

56 Similar provisions may be found in Article 1.7(2) of the Unidroit Principles ofInternational Commercial Contracts and Article 1:201 (2) PECL.

57 Compare Articles 1.7(2) and 4.8 Unidroit Principles; Articles 1:201 (2) and 6:102PECL.


The ambiguity as to the validity and scope of contractual interpretationclauses in different national legal systems must, of course, have an effect onlegal practice. For that reason, notwhithstanding the fact that there is a lotof uniformity regarding some of these clauses because they are often usedas boilerplates, their legal status may vary from jurisdiction to jurisdictionand, for that reason, local counsel should be involved in cases of doubt orproblems.

Interpretation clauses may cover a wide range of different problems andsituations in which the parties want to avoid complications arising from misunderstandings, ambiguities, not-recorded terms, contradictions or gaps. Forthe purposes of this analysis, without attempting to be complete, the following 12 categories of interpretation clauses have been identified based on theresearch of some 270 interpretation clauses found in international commercial contracts supplied by the members of the Working Group.

A. Characterization ClausesB. Contract Definition and Ranking ClausesC. Entire Agreement ClausesD. Heading ClausesE. Definition ClausesF. Language ClausesG. NOM-Clauses (No Oral Modification Clauses)H. Non-Waiver ClausesI. Severabilty ClausesJ. Gap-Filling ClausesK. Custom, Usages and Course of DealingL. Good Faith and Fair Dealing Clauses

A. Characterization Clauses

The first series of interpretation clauses relates to identifications by theparties as to the nature of their contracts. This may be the title of a contractthat often is found on the cover page of international contracts. The contract title identifies contracts and is a very useful instrument of contractmanagement for contract managers in sales, purchasing or legal departments of companies. It distinguishes contracts from one another and mayenable classifying contracts alphabetically or by subject matter. Characterizations may not only be found in the contract title but also in specific contractclauses characterizing the contract. The following examples may be given:

• "INDEPENDENT CONTRACTOR"CONTRACTOR, in performing WORK and its other obligationunder CONTRACT, shall be and shall be deemed to be an independent contractor and not the agent or employee of OWNER.OWNER shall not have any authority to supervise CONTRACTOR's


employees, representatives or subcontractors, and WORK shall beperformed under the supervision and control of CONTRACTOR.CONTRACTOR shall not have authority to make statements, representations or commitments of any kind or take any other actionswhich would be binding upon OWNER, except as is now specifically provide in CONTRACT or as may be provided in subsequentdocuments executed by a duly authorized officer of OWNER."

• "This Agreement does not in any way create the relationshipbetween Licensor and the Licensee of principal and agent, partners or joint ventures and the relationship between the parties isthat of independent contractors with each party conducting itsbusiness at its own responsibility and expense. Accordingly neitherparty hereto shall have any authority or power to incur any obligation on behalf of the other party."

• "This Agreement shall not be construed in any way to create anyjoint venture, partnership, or principal and agent relationshipbetween B and Purchaser, and neither party shall state or imply otherwise to any third party or attempt to pledge the credit of the otherparty or to contract in the name of, bind or act for the other party."

These clauses have been found under different headings and can befound as a specific contract article or be inserted in other contract clauses(such as in entire agreement clauses, definition clauses or in a miscellaneous clause). Often, they find their place after a description of the rightsand obligations of the parties but one may also consider having theseclauses at the very beginning of the contract after the recitals.

These contractual characterizations may have management objectives,for instance to serve as instructions to management to avoid that closecooperation ends in the creation of employment contracts, agency contracts or partnerships. They also have legal purposes. By characterizingtheir contracts, companies may opt for bringing contracts within the classifications of the applicable legal system. This implies that the parties, bytheir contractual characterization, seem to have intended that statutoryrules or case law rules for this class of contracts (e.g., sales) should beapplied. Since more classes of contracts are governed by codified rules incivil law countries, characterization and clauses relating thereto seem to bemore important in civil law countries. As the examples indicate, the clausesoften have two sides. On the one hand, the parties characterize the contracts as they think the contracts should be. On the other hand, they alsoindicate how the contracts should not be characterized. Characterizationclauses, thus, may have both positive and negative functionsJi8

58 For a general theory on characterization, see F. Terre, L'ir~flu,eru;ede la volonle iruli

viduelle SLlr les qUJtlifir:alions, Paris, L.G.DJ., 1957,599 pp.


In this respect, a distinction must be made between dispositive contractrules and mandatory rules. In the latter case, contractual characterizationsin international contracts will only have a limited effect if internationalmandatory rules (regles d'application immediate, Eingriffsnormen) are concerned. Then, the contracting parties will first be bound by mandatoryrules (including public policy rules59) of the law chosen by the parties or ofthe law applicable in the absence of any such choice. 60 Second, the partieswill be bound by the regles d'application immediate of the court61 hearing theircase to the extent that these rules are applicable to their situation. 62 A contractual characterization, which would, for instance, attempt to characterize an employment contract as a management contract, will be scrutinizedas to the question whether the factual circumstances of the case warrantany such qualification. If not, the contract will be disqualified and may bere-characterized by judges or arbitrators as an employment contract. Thecharacterization clause is, therefore, not as binding and final as its firstreading might suggest. During the research, only a limited number of suchcharacterization clauses have been identified. The impression is that theycertainly occur in practice but that contracting parties generally are awarethat these characterizations can be tested in court. Characterization clausesmay also be inserted for reasons related to public law. For instance, clausesemphasizing the autonomy of the parties and stating that they cannot acton behalf of one another, may be inserted to avoid that one company isheld to have a permanent establishment in the country of the other party.

59 This refers to the distinction in France between the ordrc frublir: de fJro1er:lior! andthe ordrc frublir: de direr:lior! and to the Belgian distinction between regles irn!JeraJives anddogles d'ordre public (see G. Baeteman, Les effets des dispositions legales imperatives protegeant des interets prives, case note under Belgian Supreme Court, December 6, 1956,R.CJ.B., 1960, pp. 164ff). In both cases, a distinction is made between the private interests (e.g., of employees, consumers, tenants) and the public interests (e.g., economic ormonetary organization of states, morality) which need protection by a rule of law.

60 In relation to so-called weaker parties such as employees or consumers, choice oflaw will be restricted and the conflict rules often will lead to the application of the lawof the place where the employee habitually works or-to the extent that consumer protection exists (mostly for passive consumers)-of the place where the consumer has hishabitual residence (see for instance Articles:) and 6 of the Rome Convention on the lawapplicable to contractual obligations, OJ L. 266, October 9,1980, pp. 1-19).

61 Apart from the application of the local court's international mandatory rules, oneshould note that sometimes local courts apply foreign international mandatory rules(e.g., under Article VIII(2)b) of the IMF-Treaty or under a wrnitas principle). In theEuropean Union, the possibility to apply foreign mandatory rules has been provided forin Article 7(1) of the 1980 Rome Convention on the law applicable to contractual obligations. However, Germany, Ireland, Luxemburg and the United Kingdom have used thereservation of Article 22 of the Convention to opt out of Article 7 (1).

62 In international commercial arbitration, it is unclear whether and to what extentarbitrators should apply these international mandatory rules. An analysis of this issuefalls outside the scope of this chapter.


Where no mandatory rules are involved, differences of opinions existas to the question whether a characterization by the parties in a contract isbinding upon judges or arbitrators. In France, this debate is influenced byArticle 12, paragraphs 1 and 3 of the Nouveau Code de Procedure Civile(NCPC), which read as follows:

"Le juge tranche Ie litige conformement aux regles de droit qui luisont applicables. II doit donner ou restituer leur exacte qualification aux faits et actes litigieux sans s'arreter ala denomination queles parties en auraient proposee.

"Toutefois, il ne peut changer la denomination ou Ie fondementjuridique lorsque les parties, en vertu d'un accord expres et pour lesdroits dont elles ont la libre disposition, l'ont lie par les qualificationset points de droit auxquelles elles entendent limiter Ie debat."

Some scholars have interpreted these provisions as substantive andthus conclude that a judge is bound by contractual characterizations. Aclear majority position, however, has stated that Article 12 NCPC is merelya procedural provision, which implies that a judge is only bound by expresscharacterizations made by the parties during the trial or by contractualcharacterizations that are not challenged by either party during the tria1.63

Characterization regarding dispositive rules may be relevant for mixedcontracts that have elements of two different kinds of contracts such assales and license or sales and construction. Since the rules regarding thesecontracts may be different (for instance regarding liability), a proper characterization of the contract by means of a contract clause may be important. However, the general feeling during the discussions at the meetingsof the Working Group was that a contractual characterization is not decisive and binding if it does not correspond to the essential elements of thecontract under which the clause is subsuming the contract. Thus, the finalcharacterization of the contract remains the task ofjudges and arbitrators.

In contract practice, drafters do not pay sufficient attention to clarifythe purposes of their contractual characterizations nor to the above-mentioned important distinction between characterizations relating to mandatory rules and those relating to dispositive rules. It is recommended tospecify the tax, social security, labor law or economic regulatory reasons

63 For a discussion and arguments for the latter position, see A. Laude, Larer:rmnaissance flaT lejuge de l'exisleru:e d'un r:onlral, Aix-en-Provence, Presses Universitaires, 1992,pp. 418-419. For a general discussion, see B. Fauvarque-Cosson, LibTe disponibilite desdroits et coriflits de lois, Paris, L.G.DJ., 1996, pp. 64-68.


inspiring characterization clauses as well as any other reasons that the parties may have to insert any such clauses in their contracts.

B. The Process of Contract Determination

Once the contract has been characterized in its title and, if need be, ina specific characterization clause, the parties often consider determiningthe precise scope of their contractual obligations by referring to those documents containing their obligations. These documents can be manifold: amaster contract, implementing contracts, ancillary contracts, general conditions, pre-contractual documents (such as drafts or letters of intent),annexes, schedules, price lists, drawings or technical specifications. Thus,contracting parties may determine the relationship and priority betweenthese documents and eventually to exclude some of these documents.

Unfortunately, these different elements combined are seldom in contract practice. The research indicates that there are scant contract clauses,which at the same time provide for a determination of (1) the contract documents; (2) the hierarchy of these documents; and (3) those documentsand other evidence that the parties want to exclude from the scope of theircontracts. A rare example of any such clause is the following:

"Article 14. Documents Constituting this Agreement

"The documents constituting an integral part of this Agreementand the priority of their interpretation in the event of contradiction between these documents, are set out below:

"1. The provisions of this Agreement."2. The Annexes to this Agreement to be mutually agreedupon by the parties whenever need arises during the course ofthis Agreement. These Annexes may be agreed upon by theparties by an exchange of letters or telefax-messages, signed byboth parties."3. Any correspondence signed by both parties hereto concerning mutually agreed changes, amendments or interpretations of this Agreement.

"Article 15. Entire Agreement

"Terms and conditions set forth in the Agreement and the Annexesconstitute the entire Agreement between both parties and shallsupersede any prior commitments, representation, agreementsand/or understanding either written or verbal between both parties in respect of said matter."

This clause may be used as an example for the analysis below. It indicates that parties first should define the contractual documents (1), then


the hierarchy of the various documents (2), and finally, whether and towhat extent other documents or evidence is to be excluded from the scopeof their contracts (3).

1. Contract Definition Clauses

Some contract clauses define the documents in which the contractualrights and obligations of the parties are contained. 61 These clauses werefound, inter- alia, in the construction industry for large scale projects butalso in the services sector for long-term support and maintenance contracts. Some examples:

• "1.1.7 The Joint Venture Agreement, hereinafter referred to as"this Agreement," comprises the document entitled Conditionsand Terms together with Schedules 1 to 4 attached there to andsuch other documents as may be specified in Schedule 1 to formpart of this Agreement;"G5

• "This agreement shall mean this present document and all annexes,exhibits and other documents referred to herein or attached heretoand signed or initialled by the parties hereto all of which annexes,exhibits and other documents form an integral part hereof."

Sometimes, these clauses only refer to annexes or exhibits that throughthe operation of these clauses, are incorporated into the contract as the following examples show:

• "Annexes"Les Annexes ala presente Convention en font partie integrante."

• "Exhibits. All Exhibits to this Agreement are hereby incorporatedby reference as though fully set forth herein."

For reasons of precision and because annexes are usually numbered,clauses sometimes specifically refer to the numbered annexes:

"10.12. Annexes. The aforementioned Annexes No.1 to No. 12."

2. Ranking Clauses

The contractual documents being defined, contract clauses sometimesprovide for the ranking of these various documents.66 This ranking is par-

64 These clauses are inserted at the beginning of the contract in a specific clause, inthe definition clause of the contract or in an entire agreement clause at the end of thecontract.

65 FIDIC'sJoint Venture (Consortium) Agreement, in Guide to the Use ofFIDIC'sSub-Consultancy andJoint Venture (Consortium) Agreements, FIDIC, Lausanne, 1994,Appendix B, 10.

66 These clauses are found in a specific clause at the beginning of the contract


ticularly relevant to avoid contradiction between the numerous contractdocuments67 and determines the priority order of the contractual documents. Some examples may be cited:

• "1.3 Conflicting Provisions"In the event of any conflict between this CONTRACT and any of theAttachments hereto, the terms and provisions of this CONTRACTshall control. In the event of any conflict among the Attachments, theAttachment of the latest date shall control."

• "13.2. In the event of any conflict or inconsistency among the provisions referred to in the preceding paragraph the order of priority shall be the order in which such provisions are listed."

• "2 (iii) If there is conflict between provisions of the Agreement,the last to be written chronologically shall prevail, unless otherwisespecified in Part II. "68

In order for any such clause to become operational, one must firstdetermine whether there is a conflict between the contract documents.The above-mentioned clauses do not address this issue and may have thedisadvantage of operating too automatically or, in practice, to be inoperative. However, some clauses in this respect impose a contextual interpretation. The contract clauses are to be read in combination with one anotherin order to determine whether there is a conflict. Ranking clauses are to beapplied only if context cannot provide an answer to the interpretationproblem. The following clauses are examples of any such clauses:

• "Should there be any conflict, discrepancy, inconsistency or ambiguity between any documents of the Contract, then, unless otherwise expressly provided, the provisions of the Contract shall prevailon the provisions of the Exhibits, ..."

• "Subject to the foregoing, the Contract Documents are intendedto be correlative and mutually explanatory."

• "Any specific obligation incumbent upon a Party or the Partiespursuant to the provisions of the Schedules shall be read and interpreted in conjunction with the terms hereof. In case of ambiguity,

together with a contract definition clause, in the definition part of the contract or in theentire agreement clause at the end of the contract. Their headings are labeled conjlicting provisions, priority ojdocurnents, rank oj docurnents or the like.

67 See M.H. Maleville, of}. cil., p. 30.

6S Clause 2(iii) of the Client/Consultant Model Services Agreement-The WhiteBook, FIDIC, Lausanne, 2nd ed., 1991. One may wonder how one could possibly determine the chronology of writing of contract clauses. Maybe the clause refers to the orderof the contract clauses under which, for instance, Article 28 would prevail over Article27. But this approach seems to be arbitrary because it is unrelated to the substance ofthe clause.


inconsistency or incompatibility between any provision hereof andany provision contained in these Schedules, the provision of thisAgreement shall prevail over the Schedules."

These clauses may still be too generic and provide insufficient flexibility. One may thus occasionally find extensive contract language to provide for exceptions to the operation of these clauses and to determine aprocedure to modify the contract. These clauses were found in the construction industry where variation orders are generally used to modifY thecontract where a ranking clause would prove to cause difficulties to one ofthe parties. In those cases, a third party (engineer) is involved in the variation process. 69 The following clause refers to such a contract modification process:

"Should there be any conflict, discrepancy, inconsistency or ambiguity between any documents of the CONTRACT, then, unless otherwise expressly provided, they shall rank in the order of prioritylisted in sub-Article 1.1., subject however to the provisions of subArticle 2.10 herebelow."

Ranking clauses may establish the relationship between the contract inwhich they are contained and other contracts. For instance,

"In case of conflict between this Agreement and theJoint OperatingAgreement, this Agreement shall prevail as between the Parties."

or in relation to a sub-contract and a main contract:

"In case of conflict between the appended clauses of the MainAgreement and the other clauses of this Agreement, the documents shall rule in the order prescribed herein, or, if no order isprescribed, the appended clauses of the Main Agreement shallhave precedence."7o

If the related contract has an identical clause, there hardly can be anydiscussion as to which contract should prevail. If not, any such clause canbe deemed to be incorporated into the other contract provided the contracting parties are parties to both contracts. However, other parties can, inprinciple, not be bound by such a clause.

69 The situation is similar to the intervention of an expert or arbitrator in circumstances causing hardship to one of the parties, see, in this respect, Chapter 9.

70 Clause 2.3.3 of the Sub-Consultancy Agreement, in Guide to the Use of FIDIC'sSub-Consultancy andJointVenture (Consortium) Agreements, FIDIC, Lausanne, 1994,Appendix A, 10.


3. Contract Definition and Ranking Clauses

Elements of contract definition and ranking can also be combined.This approach is taken by some of the FIDIC contracts.

"Definitions 1.1 (b) (i) "Contract" means the Conditions (Part I andII), the Specification, the Drawings, The Bill of Quantities, TheTender, the Letter of Acceptance, the Contract Agreement (if completed) and such further documents as may be expressely incorporated in the Letter of Acceptance or Contract Agreement (ifcompleted) ."

"Priority of Contract Documents 5.2 The several documents forming the Contract are to be taken as mutually explanatory of oneanother, but in case of ambiguities or discrepancies the same shallbe explained and adjusted by the Engineer who shall thereuponissue to the Contractor instructions thereon and in such event,unless otherwise provided in the Contract, the priority of the documents forming the Contract shall be as follows:

(1) The Contract Agreement (if completed);(2) The Letter of Acceptance;(3) The Tender;(4) Part II of these Conditions;(5) Part I of these Conditions; and(6) Any other document forming part of the Contract."71

C. Entire Agreement Clauses72

Having defined the contract documents and their ranking, the partiesoften provide for clauses that freeze the contract as it is in its written form.These clauses are hereafter referred to as entire agreement clauses (integralitedes conventions, accord complet, Vollstiindigkeitsklauseln). This terminology isoften used in the headings of these clauses but other headings (e.g., previous agreements, former agreements, entire contract, whole agreement,

71 Conditions of Contract for Works of Civil Engineering Construction-The RedBook, FIDIC, Lausanne, 4th ed., 1989. Similar provisions may be read in clauses 1.11.3 and5.3-5.4 of the Conditions of Contract for Electrical and Mechanical Works-The YellowBook, FIDIC, Lausanne, 3rd ed., 1988, in clauses 1.1.1.1 and 1.6 of the Conditions ofContract for Design-Build and Turnkey-The Orange Book, FIDIC, Lausanne, 1st eel.,1995 and in clauses 1.1(b) (ii) and 3.4 of the Conditions of Subcontract for Works of CivilEngineering Construction, FIDIC, Lausanne, 1994, 1st ed.; compare clause 2(iii) of theClient/Consultant Model Services Agreement-The vVhite Book, FIDIC, Lausanne, 2nded., 1991.

72 See H. Dubout, foes clauses d'entire agreement (accord complet) dans les contrats internationaux: interet et precautions d'utilisation, Cahiersjuridiques et fiscaux de I'exportation,c.F.c.E., 1989, No.1, pp. 193-209.


complete agreement) sometimes are also used. The terms four corner clauses73

or the U.S. tenus merger clauses or integration clauses, however, have hardly beenfound in the contract clauses that were the subject of the research.

As will be seen below (see Section C.3), the American terms of mergeror integration clauses reflect the function of these clauses better. Because inEngland and in civil lawjurisdictions the terms of entire agreement clause istraditionally used, this concept will be used hereafter. It is suggested that theterm four corner clause is to be rejected because it is misleading and confusing as to the function of these clauses (see Section IlLC.3).

Simple examples of entire agreement clauses may read as follows:

• "11.1 This contract, including all the schedules attached heretowhich represent an integral part hereof and have been signed bythe parties, constitutes the entire agreement between the parties."

• "Ce contrat contenant l'integralite de l'accord intervenu entre lesparties ne peut etre modifie que par ecrit dument signe par chacune des parties."

In only one case did the entire agreement clause provide that the context might indicate that the clause could not automatically be enforced:

"Entire Agreement. Unless the context otherwise requires, thisAgreement (including its Exhibits) represents the entire agreement existing between the parties relative to the subject matterhereof."

These clauses in their simplicity are extremely difficult to interpretbecause they do not draw any conclusions from their entire agreement language. Thus, it is recommended not to use such vague clauses. In its analyses, the Working Group did find different functions that may be attributedto entire agreement clauses:74

73 The terminology is used in Belgium as a result of its use in two books: D.Deschoolmeester, & G. Vandenberghe, De keuze van een computer, pp. 142-143 and H.Gevaert, .furidische fm:uenlie bij cornfrulen;onlnu;len, Brugge, die Keure, 1983, pp. 7-9 (translated as La priuention fwidique des contrats inJoTfnatiques, Bruges, la Charte).

71 Other exclusionary functions may also be envisaged. For instance, the followingclause is cited by Dubout (op. cit., pp. 202-203):

"Cependant les obligations des parties ne seront pas limitees a cellesenumerees dans Ie contrat quanclla loi impose d'autres obligations, etanttoutefois entendu que Ie contrat prevaudra sur toute loi avec laquelle il esten contradiction ou qu'il exclut expressement pour autant que cela soitjuridiquement possible."

For a discussion of this clause, see H. Dubout, loco cit., pp. 202-208. Similar clauseshave not been encountered during the research project and, therefore, such clauses


1. Exclusion of simulation (side letters, contre-lettres);

2. Exclusion of previous contracts;3. Exclusion of pre-contractual documents;4. Exclusion of written or oral representations;5. Exclusion of general conditions;6. Exclusion of future contracts.

From the outset, one may note that most entire agreement clauses donot address all these functions. In this respect, it is recommended that contract drafters keep these different functions in mind and clearly spell outwhich of these objectives are to be met by the clause.

Before embarking on further analysis, one preliminary point needs tobe noted. Entire agreement clauses have their origin in Anglo-Americanlaw where they serve exclusionary objectives and, thus, may exclude extrinsic evidence but only in relation to terms on which the parties may haveagreed and that may contradict the agreement in writing or that prove thatthe parties have agreed on additional terms not reflected in the writtenagreement. However, they do not impose strict or literal interpretation norintro-interpretation in order to deal with ambiguities and gaps of the contractnor do they necessarily address variations agreed upon by the parties oncethe contract has been concluded. The key issue regarding these clauses iswhether they are to be applied in conformity with their historical originwhen they are used in a civil law context or whether they need to beadapted and interpreted in any such perspective. From a practical point ofview, these issues may be avoided by not importing these clauses ne varietur

in a civil law context but to re-draft them in order to clarify these clausesand to adapt their Anglo-American objectives to the civil law.

1. Exclusion of Simulation (Side-Letters or Contre-Lettres)

Simulation occurs where the written contract document does not coincide with the common intentions of the parties because the parties havemade a side contract (contn? lettr-es) deviating from the main written contract. This can, for instance, be inspired by tax reasons to state in the written deed a lower purchase price for a real property transaction than whatthe parties actually have agreed to pay in order to reduce tax liabilities forincome or registration taxes. But there may also be legitimate reasons todraft a side-letter if, for instance, confidential information is disclosed andthe contract needs to be submitted to government institutions for approvalor to banks or insurance companies to obtain finance or credit insurance.

have not been included in the classification. The clause cited above intends to liberatethe contract to the largest extent possible from dispositive rules of the governing law. Itis a matter of discussion whether and to what extent such a clause in an internationalcontract may be characterized as a choice of law provision which detaches the contractfrom any national governing law and whether the contract is then subject to lex rnen;alo

J7a or similar concepts. This debate falls outside the scope of this chapter.


Article 1321 of the French and Belgian Civil Codes provide that theseside-letters only bind the parties theret07S and cannot be invoked againstthird parties.

An entire agreement clause may exclude the application of the theoryof simulation. However, this problem was identified and discussed only during one meeting of the Working Group, but no contract clauses have beenfound reflecting this problem or the intention of the parties to exclude thetheory of simulation. It is submitted that this will occur infrequently inpractice,76 and that the parties, if they intend to use side-letters, should notuse an over-comprehensive entire agreement clause or, in case of a dispute,object to giving an entire agreement clause such an extensive reading thatit would also cover excluding simulation.

2. Exclusion of Previous Contracts

A second function, which entire agreement clauses may have, is toexclude previous contracts, which are still in force, from the scope of theparties' contractual obligations. These clauses intend to avoid the co-existence of different contracts. The following clauses are examples:

• "This Agreement specifically supersedes the joint venture agreement between Seller and Purchaser. This joint venture agreementwill consequently be terminated."

• "The Distribution Agreement and the Letter Agreement (exceptfor those provisions setting forth the terms of the Warrants) arehereby terminated."

These clauses are part of more broadly formulated entire agreementclauses in two contracts. In both cases, an older contract came to an endand a new contract was concluded between the same parties. Thus, the contract drafters of these contracts intended the new contracts to reflect all ofthe parties' rights and liabilities and, consequently, in their entire agreement clause excluded the older contracts by providing that these have orwill be terminated. It remains, however, unclear what the consequences areof any such termination, for instance, if and to what extent there may stillbe obligations under these contracts.

It is unclear if the same conclusion can also be reached in the absenceof any such sunset clause. Much will depend upon the wording of the entireagreement clause. If it is a boilerplate clause, which only provides that thewritten document constitutes the entire agreement between the parties,

75 See also Article 6:103 PEeL. The Unidroit Principles do not seem to have a provision regarding simulation.

76 In literature, the problem is also mentioned in A.G.J. Berg, op. cit., p. 172.


one may doubt, on the basis of that provision alone, whether the correctinterpretation under both the subjective and objective theories is that theolder contract was terminated by the entire agreement clause. 77 Underboth theories, one will-based upon a search for the common intention ofthe parties or an assessment as to what is reasonable under the circumstances-conclude whether the old contract was terminated. The more specific the clause is, the more likely the conclusion will be that a new contracthas replaced the previous contract. Also, the survival clause of the previouscontract may be relevant in assessing the situation. 78

The position may be somewhat different under English law because ofthe tradition of literal interpretation where judges will give more weight tothe precise drafting of the entire agreement clause. It is recommended tospecifically include the case of previous agreements regarding the samesubject matter in broadly phrased entire agreement clauses or to add thiscircumstance to contract drafting checklists. On the other hand, oneshould also warn against the automatic effect of an overly detailed entireagreement clause, as the following clause of the ICC Model Agency andDistributorship Contracts79 illustrates:

"Article 26 Previous agreements-Modifications-Nullity26.1. This contract replaces any other preceding agreementbetween the parties on the subject."

"Article 26 Previous agreements-Modifications-Nullity-Assignment26.1. This contract replaces any other preceding agreementbetween the parties on the subject."

Since agency and distribution contracts may first be concluded orallyor for fixed-term periods, one should carefully review whether the clausesset forth above correspond with the intentions of the parties to exclude allprevious arrangements that may have been agreed upon orally, by exchangeof correspondence, by riders to contracts and the like. Depending on the

77 In a New York case, it was held by the New York Court of Appeals that, absent contrary intent, a boilerplate entire agreement clause is not to be interpreted to exclude theapplication of arbitration clauses in two previously concluded contracts. Thus, court proceedings regarding these two contracts were stayed and the parties were referred to arbitration notwithstanding the fact that the later agreement containing the entireagreement clause had no arbitration clause. The arbitration clauses of the two previouscontracts were deemed to have survived the termination of these contracts and not tohave been excluded by the entire agreement clause (Prirnex International Cmp. v. WalMart Stores Inc., 679 N.E.2d 624 (N.Y 1997)).

78 On survival clauses, see infra, Chapter 13.

79 Article 26(1) of the ICC Model Commercial Agency Contract, ICC PublicationNo. 644, Paris, ICC Publishing, 2002; Article 26(1) of the ICC Model DistributorshipContract, ICC Publication No. 646, Paris, ICC Publishing, 2002.


industry and the transactions involved, one may consider using either avery broadly formulated clause80 or a clause that specifically refers to oldercontracts that have or are to be terminated. In the latter case, one needs toaddress the question whether the clause is aimed at only dealing with theissue of the relationship between the contract and previous contracts orwhether the clause also aims at other objectives.

3. Exclusion of Pre-Contractual Documents

The third function of entire agreement clauses is probably the function that is best known in international contracts and that raises difficultproblems, particularly from the perspective of civil lawjurisdictions. It occurswith complex transactions where long negotiations and/or intensive draftingis required. These transactions often imply the use of letters of intent, memoranda of understanding (MoD), heads of agreement, exchanges of correspondence and information, minutes of meetings and different drafts andpre-contractual arrangements.8l Also, some oral arrangements sometimeshave been made at the contract preparation stage.82 All this may happenprior to the signing of the contract; oral arrangements can also be made atthe time of contract signature.83

80 For an example of such a clause written for groups of companies with a parentcompany and subsidiaries where the possibility has been provided to deviate in writingfrom the automatic application of the clause:

"Entire agreement.

Save as otherwise agreed in writing between the Principals or any membersof their respective groups, this Agreement and the other PrincipalAgreements supersedes any previous agreement between the parties andother members of each Principal's Group (including their respectiveemployees, agents and advisers) in relation to the matters dealt with hereinand represents the entire understanding between the parties in relationthereto."

81 During its discussions, the Working Group also addressed the specific issue of therelevance of entire agreement clauses in notification documents filed with the EuropeanCommission in Brussels regarding merger control. The notification may have relevancefor actions in relation to liability for precontractual liability or for interpretation purposes. There was more doubt whether agreed terms reported in the notification but notrecorderd in the agreement between the parties are to be excluded by operation of anentire agreement clause.

S2 For a clause where this situation was specifically covered, see

"Mundliche Nebenabsprachen zu diesem Vertrag bestehen nicht. Aenderungen derVereinbarung einschliesslich del' ilun beigefligten Anlagen bedtirfen zu ihrer Wirksamkeit del' Schriftfonn."

83 A different problem with references to contract negotiations in recitals may arisewith regard to the entire agreement clause of the same contract, see H. Dubout,L'interpretation des contrats internationaux et la pratique des preambules, report presented at the 25th anniversary conference of the Groupe de Travail, Paris, March 2, 2001(unpublished).


The issue that arises is whether all these written extra- or pre-contractual documents and other evidence regarding the gradual formation ofthe contract may be used. These clauses are problematic in common lawjurisdictions because they tend to exclude the parol evidence rule, whichimplies that they intend to exclude evidence other than the written agreement to prove the terms on which the parties agreed and which contradictor add to the agreement in writing. The common law origin of theseclauses generally is not properly understood in civil law jurisdictions.Hence, these clauses in the latter jurisdictions may-incorrectly-beunderstood to serve purposes such as not to fill gaps, to exclude variationsor to exclude evidence other than the contract in writing to solve ambiguities in contract terms.84

Another reason for the miscommunication as to the meaning of entireagreement clauses is probably related to their headings and language.Wording such as entire agreement (accord complet) for lawyers from civil lawjurisdictions may suggest that extrinsic evidence may neither be used toprove contradicting or supplemental terms agreed upon between the parties nor to fill gaps, vary contract terms or solve ambiguities. American terminology in merger or integration clauses reflects more clearly thepurposes served by these clauses in common lawjurisdictions.

The risk of broad reading of entire agreement clauses in civil lawjurisdictions does not seem to be warranted by their initial meaning in the common law. For the purpose of this analysis, the historical origin of entireagreement clauses is taken into account and these clauses are analyzedhereafter according to whether evidence other than the contract in writingmay be excluded to establish contract terms agreed upon by the parties,but not reflected in the written contract, which either contradict the agreement in writing or add terms to it.

Entire agreement clauses attempt to exclude all that evidence. Just afew examples:

• "La presente Convention acompter de sa signature represente latotalite de l'accord des parties et par consequent annule et remplace tous documents anterieurs qui auraient pu etre echanges oucommuniques dans Ie cadre de la preparation et de la negociationde la presente Convention."

• "Integralite des conventionsLe present Contrat ainsi que ses annexes qui en font partie integrante, constitue l'integralite des engagements entre les Parties et

81 H. Dubout, loco cit., pp. 197-200; compare E. Rawach, loa portee des clauses tendantr2 exdure le T(Jle des documenls fJTer;onlracluels dans l'inlerfnelalion du r:onlral, Dall. 2001, pp.223-226.


etablit l'ensemble de leurs droits et obligations et il annule tous lesautres engagements verbaux ou ecrits anterieurs que les Partiesauraient pu souscrire quant ason objet."

• "Entire Contract. This contract contains the final and entire agreement between Seller and Buyer and any prior or contemporaneous understandings or agreements, oral or written, are mergedherein."

• "Whole Agreement and Variation. This Agreement (including alldocuments to be executed pursuant to Clause 4) and the Disclosure Letter contain the whole agreement between the parties relating to the subject matter of this Agreement and no variation of thisAgreement shall be effective unless in writing and signed by or onbehalf of each of the parties."

• "Entire Agreement; ModificationThis Agreement and any Exhibits hereto constitute the entireAgreement between the parties concerning the subject matterhereof. It supersedes any proposal or prior agreement, oral or written, and any other communication and may only be modified in awriting signed by both parties."

• "La presente convention annule et remplace tous les conventions,arrangements, promesses ou accords precedents, y compris les lettres d'intention, qui porteraient sur la presente garantie, ou les elements qui y sont mentionnes."

As the examples cited above indicate, these kinds of entire agreementclauses are often very broadly phrased and do hardly provide for exceptions. Contract drafters may, however, consider whether some qualificationsare not in order in specific situations. One example may be quoted wherethe clause provides for an exception to a confidentiality agreement thatapparently was signed at the contract negotiations stage:

"It is also however understood that the Proprietary Informationand Non Disclosure Agreement between the Parties remain in fullforce and effect according to its terms and conditions with respectto all the information exchanged between the Parties within thescope defined in such Proprietary Information and Non DisclosureAgreement prior to or independently of this Agreement."

One additional clause has been found during the research where theparties waived their rights to sue on the basis of pre-contractual liability:85

"Except in the case of fraud, no party shall have any right of actionagainst any other party to this Agreement arising out of or in connection with any pre-contractual statement."

85 See also Chapter 1.


This clause may not be as clear as one might expect, but it shows thatthe parties might insert express waiver clauses as to pre-contractualliability. As a matter of principle, these waiver clauses should be held validand effective because commercial parties must be considered to be capable of disposing of their rights by means of a waiver including a pre-contract waiver.

On the other hand, this clause points to the fact that in the absence ofsuch a clause, the entire agreement clause does not purport to exemptfrom liability in case of negligence during negotiations.86 In practice, thisimplies that pre-contractual documents should carefully be stored to safeguard litigation positions to liability proceedings stemming from pre-contractual conduct as for instance in case of a break-off of negotiations.

During its meetings, the Working Group extensively discussed the merits and drawbacks of the typical entire agreement clauses. These clauseshave the advantage that the massive documentation produced in the precontractual period can be excluded from the scope of the contract. Thepre-contractual period, in many cases, will not give conclusive answers toresolve the issues whether the parties were in agreement about terms thatsupplement or even contradict the terms of the final written contract. Manydocuments probably willjust confirm the contradictions and disagreementsbetween the parties during the negotiations whether some terms were tobe included in the final contract. Furthermore, the clause may avoidexpensive litigation requiring extensive fact finding. On the other hand,the clause might prevent the parties, judges and arbitrators from findingimportant and sometimes conclusive evidence as to whether the parties hadagreed on a term and, thus, might impair substantive justice. Based onthese considerations, there were mixed feelings among the members of theWorking Group about the final assessment of these clauses. In the end andon balance, lawyers from civil lawjurisdictions were somewhat reluctant toendorse the use of these clauses fully and argued in favor of using theseclauses with restraint and with qualifications.

However, in view of the frequency and importance of these clauses, onemay question whether the analysis should not be pushed further. In orderto determine the nature and the scope of these entire agreement clauses,one should refer to the countries where these clauses originate. Because oftheir Anglo-AInerican origin, where these clauses have existed for at least30 years,87 lawyers from common lawjurisdictions and for contracts under

86 Ph. Marchandise, La libre Ilt~gociation,Droits et obligations des negociateurs, inLe fUTiste dans la negociation, Le dfVit des ajfaiTes en evolution, Volume 9, Association beIgedesjuristes d'entreprise, Brussels, Bruylant, 1998, p. 19.

87 In a series of contracts drafted since 1973 by a leading London law firm for aBritish company, these clauses were already used.


the law of a common law jurisdiction generally would endorse the use ofthese clauses. Under the laws of civil law countries, there is, however, somedoubt as to the legal status and enforceability. One of the major problemsis to reconcile the foreign origin of these clauses with the basic assumptions and principles of contract interpretation of civil law countries. Thedistinction, however, is not so much between common and civil law countries but much more between the subjective and objective theories regarding interpretation where French law is the theoretical archetype of thesubjective model, whereas Germany is of the objective models. It wasnoted that the United States has features of the German model, whereasEnglish law has a somewhat isolated position because of its insistence onliteral interpretation. For that reason, the issue exists more between theEnglish model applicable in many common law countries but not in theUnited States, and the other countries. To that, one should add thatFrench law, in its practical application, is closer to the other countries thanto the English model.

On that basis, one could argue that these entire agreement clauses willgenerally be upheld and enforced by English courts and under Englishlaw as well as by English-style jurisdictions. However, with regard to otherjurisdictions, there is doubt as to the legal status of these clauses and someauthors, under the objective theory, doubt whether the parties mayexclude judicial intervention to interpret contracts.88 The basic argumentunder the objective theory is that good faith and fair dealing is a principleof a higher ranking than party autonomy and that, therefore, entire agreement clauses may still be reviewed by courts on the basis of their compatibility with good faith and fair dealing. As such, the entire agreementclause would not be invalid but can be reviewed if it amounts to an abuseof contractual rights by one of the parties (the Schrankenfunktion of Treuund Glauben under German law or the derogatory effect of good faith andfair dealing under Dutch law). However, if the clause only attempts toexclude terms on which the parties have agreed and which add to or contradict the terms of the agreement in writing, it does not seem to conflictas such with good faith and fair dealing and amounts to an express waiverby a party (renonciation anticipee).

Under French and Belgian law with their greater sympathy for partyautonomy, this category of entire agreement clauses generally will beenforced as validly formed contract terms under Article 1134 Code Civil,but abuses of contract rights will not be protected. On the other hand,

SS See, for instance, E.H. Hondius, De 'entire agreement' clausule: Amerikaansecontractsbedingen in het Nederlandse recht, in Recht als norrn en aspiratie, Nijmegen,1986, pp. 24-34; wnlTa R.PJ-L. Tjittes, De parol evidence rule, in Koop, BW-kranljaaTboek 14, Deventer, Gouda Quint, 1998, p. 45; R.PJ-L. Tjittes, De belekenis van de flaml evidence rule in het Arnerikaanse contTactenrecht, Contracteren, 2002, pp. 4-12.


judges in these countries will be interested to know whether the entireagreement clause corresponds to the common intention of the parties. Ifevidence is produced-in contravention of the entire agreement clauseshowing the real intentions of the parties, courts may be inclined toenforce these real intentions and forego the entire agreement clause subject, in France, to the application of the theory of clauses claires et precises ifthe entire agreement clause is crystal clear as to the exclusion of pre-contractual documents. However, if an entire agreement clause can be construed as an express waiver to invoke additional or contradicting terms, itwould again be difficult to forego the clause.89 The dogmatic foundationfor bypassing the entire agreement clause~)() could then be found in its boilerplate nature ("clause de style"), which implies that there is no real agreement between the parties regarding this clause causing the final writtenterm to be preempted by another term proving that there was party agreeement. However, the question arises whether this technique of protectionagainst standard contract terms may be used in tailor-made contracts. A second technique could be to argue that the entire agreement clause constihItes a refutable presumption where evidence to the contrary may bebrought. One wonders whether this characterization fits well with the common law origin of these clauses. This also implies that the entire agreementclause is characterized as a procedural clause relating to evidence, and thequestion arises then whether entire agreement clauses may be construedin accordance with any such characterization. The answer is probably negative. Thus, these clauses, from a substantive point of view, seem to be validand enforceable under French and Belgian law subject to the general reservation of abuse of rights.

As to the civil law position regarding the effects of entire agreementclauses, the hesitations were probably most convincingly expressed duringthe discussions within the Working Group in the formulation of the argument that common sense would dictate thatjudges and arbitrators first areto admit the evidence and then to reject it if proven to be unconvincingrather than to declare it inadmissible from the outset.

One other aspect of these clauses is their role in civil litigation. Twointerpretations are possible. First, one may interpret these entire agreement clauses as substantive clauses, for instance, as anticipatory waivers. Ifso, the analysis set forth in the preceding paragraph applies. But one mightalso characterize these clauses as procedural evidence clauses . One suchclause has been found in the research:

S9 In this sense, Arbitral Award ICC, Case 9117, 10 Bull. emu: Int. Arb. ICC, 1999, No.2, p. 96 (on the basis of Russian law, Clse and Article 2.1.17 Unidroit Principles).

90 The discussion of methods to circumvent entire agreement clauses is based on aletter by Professor Christine Chappuis to one of the authors dated June 11, 1999.


"Terms included herein may not be contradicted by evidence ofany prior oral or written agreement or of a contemporaneousoral or written agreement, except as set forth in the precedingparagraph. "

Under such a characterization, contracting parties may conclude evidence agreements91 covering the means of evidence, the burden of proof andthe assessment of evidence. In international contracts, these problems aregenerally solved through application of the law of the judge deciding thecase (the lex fori), the law applicable to the contract (the lex causae) or thelaw where the contract is concluded, where the parties are or where anagent acts.92 If evidence agreements are permitted under any of these laws,the entire agreement might remain unchallengeable. As has been noted inSection II, such clauses seem to be enforceable under French, Belgian andDutch law. Under German and Swiss law, these clauses may reverse the burden of proof but could not relate to means of evidence or the assessmentof evidence. In Germany, Section 11 No. 15 of the Statute on GeneralConditions (now Section 309(12) BGB) implies that entire agreementclauses used in general conditions cannot prevent the party against whomthe clause is invoked from establishing evidence that there are terms otherthan the written ones between the parties.93 This provision is to be characterized as substantive (and not procedural) since it refers to substantivereview of general conditions and thus, it is applicable in international contracts if the governing law is German. Finally, contrary to the EU Directiveon unfair contract terms, it not only applies in consumer transactions butalso between merchants, and only if the governing law is German law.

The procedural characterization of entire agreement clauses is corraborated by their Anglo-American origin. As to the paml evidence Tule, entireagreement clauses purport to exclude extrinsic evidence to establish contract terms that contradict or add to written terms, but generally do notintend to affect the meaning to be given to contract terms where theseterms are ambiguous, or to rule on the filling of contractual gaps. UnderEnglish law, entire agreement clauses are aimed to protect against arguments that the written agreement does not constitute the entire agreementbetween the parties or against findings in litigation that there is a collateral

91 One might compare these clauses with contract clauses providing that expertdetermination (e.g., regarding termination accounts or adaptation of contracts) is conclusive and binding (see infra, Chapters 9 and 12).

92 See Articles 9 and 14 of the 1980 Rome Convention on the law applicable to contractual obligations.

93 Brandner, in Ulmer/Brandner/Hensen, AGB Gesetz, 8th ed., Cologne, Otto SchmidtVerlag, No. 636; German Supreme Court, November 26,1984, A!JW1985, 623 at 630.


agreement between the parties.94 In American law, these clauses (oftencalled merger clauses) are aimed to render the application of the parol evidence rule precise and to attempt not so much to exclude contradictingterms but to provide for complete integration and, thus, to preempt prioror contemporaneous additional agreements. Traditionally, these clauseswere upheld by U.S. courts as reflecting the parties' intentions, but thereis also a tendency to review whether these clauses comply with the realintentions of the parties. In this latter perspective, entire agreementsclauses are strong indicators of party intent but are not conclusive.95

However, in common law jurisdictions, entire agreement clauses arenot intended to exclude extrinsic evidence to prove the meaning to begiven to ambiguous contract terms,96 to exclude terms implied by law andto fill contract gaps. It is recommended to distinguish clearly between theexclusionary purposes of an entire agreement clause and interpretativeguidelines given to judges and arbitrators. In this latter respect, oneshould reflect whether one intends to exclude terms implied by law, to fillgaps or to exclude extrinsic evidence for solving ambiguities. Generally,caution is in order because any such exclusions may raise difficult problems if the written contract proves to contain gaps or ambiguities. Theseover-inclusive clauses may then create rather than solve problems.Contract drafters should be aware that they cannot provide for all contingencies and that it may be an illusion to be able to create completeand unambiguous contracts.

Reference may also be made to CISG, which does not contain anexplicit provision regarding the application of rules of evidence such as theparol evidence rule that has led to some controversy over whether the parolevidence is compatible with the Convention in sales litigation.97

94 A.GJ. Berg, Of). cil., 171.

95 Farnsworth on Contracts, op. cit., II, 223ff.

96 Farnsworth on Contracts, op. cit., II, 253 stating that an entire agreement clause mayrestate the "plain meaning rule" but is unlikely to be enforced if going beyond thatpoint. See also E.A. Farnsworth, The Interpretation of International Contracts and theCase of Preambles, I.B.LJ, 2002, pp. 275-277 who emphasizes that an entire agreementclause may convince courts to declare that a contract clause is clear and, thus, needs nointerpretation.

97 For a CISG-case where summary judgment on the issue of the non-application ofthe parol evidence rule was refused, see 1\1CG'-1\1arble Ceramic Center Inc. v. Ceramica NuovaD'Agostino S.p.A., 1998 U.S. App. Lexis 14782,1998 WL 343335 (Ct. App. 11th Cir.). Thisdecision was followed in two District Court cases where the parol evidence rule wasrejected in CISG-cases (Mitchell Ain:n~rt Sf)ares Inc. 7). Eumf)ean Aircr(~fl Service AB, October10,1998,23 F. Supp. 2d 915,1998 U.S. Dist. Lexis 17030, 1998 vVL 754801 (U.S. DistrictCourt N.D. Illinois, Eastern Division) and Calzaturijicio Claudia s.n.c. v. Olivieri FootwearUd., April 6, 1998, 1998 vVL 164824 (U.S. District Court, S.D.N.Y). For the application


One should note the compromise solutions regarding merger clausesproposed by the Unidroit Principles and the PECL. Under Article 2.1.17 ofthe Unidroit Principles, the parol evidence rule is ruled out and extrinsicevidence is admissible to supplement or even contradict a written contract.However, if the parties have inserted a merger clause,98 the article providesthat any such clause is to exclude supplementing or contradicting the written contract by extrinsic evidence, but statements or agreements may stillbe invoked to interpret the writing. Similarly, Article 2:105 PECL providesthat merger clauses imply that prior statements, undertakings or agreements do not form part of the contract, but prior statements may still beused to interpret the contract. There are, however, some differences withthe Unidroit Principles. First, the PECL attempt to protect against generalconditions both in consumer transactions and business transactions. Thisprotection was not deemed necessary under the Unidroit Principles, whichapply only to international commercial contracts and which may haveworldwide application. The PECL are, however, intended to re-state contract law in the European Union only, and protection against general conditions was considered necessary. Thus, the PECL state that merger clauses,which are not individually negotiated, only create a presumption that priorstatements, undertakings or agreements do not form part of the contract.Consequently, the burden of proof is reversed and a consumer or merchant faced with general conditions used by the other party might produceextrinsic evidence to supplement or contradict the written instrument. Inthat case, the merger clause is weakened and amounts to a reversal of theburden of proof. Second, the PECL-unlike the Unidroit Principles-statethat their rule on merger clauses regarding protection against general conditions cannot be excluded or restricted by agreement. Third, the PECLrule providing that merger clauses do not affect the interpretation of contracts and the use of prior statements and understandings to that effect canonly be excluded or restricted by an individually negotiated clause. Finally,unlike the Unidroit Principles, the PECL have an express waiver rule for

of the parol evidence rule, see Beijing Melals & Minerals Imf)()rl/Exf)()rl Corfl. v AmericanBusiness Center; Inc., 993 F.2d 1178 (5th Cir. 1993) approved by D. Moore, The parol evidence rule and the United Nations Convention on Contracts for the International Saleof Goods: Justifying Beijing Metals & Minerals Import/Export Corp. v AmericanBusiness Center~ Inc., Brigham Yrnmg Univ. Law Rev., 1995, p. 1347 and the criticism byH. Fletchner, More U.S. Decisions on the U.N. Sales Convention: Scope, Parol Evidence,"Validity" and Reduction of Price under Article 50, 14JL. & Com. 1995, p. 153. See alsoC. Giovannucci Orlandi, Procedural Law Issues and Uniform Law Conventions, Rev. IJr:lIni!, 2000, pp. 32-36; P. Galleo, The Inapplicability of the Parol Evidence Rule to theUnited Nations Convention on Contracts for the International Sale of Goods, 28 IIof~lra

Law Pum., 2000, pp. 799-833. As to this controversy, it is relevant to note that, in 2004,the CISG Advisory Council in its third opinion has expressed the proposition that thereis no room for the parol evidence rule in CISG cases.

98 The comment to Article 2.1.17 at p. 64 also describes these clauses as integrationclauses.


merger clauses under which a party, by his statements or conduct, can beprecluded from asserting a merger clause to the extent that the other partyhas reasonably relied on this statement or conduct.99

For international commercial contracts, both principles indicate thatentire agreement clauses are gaining international acceptance, but thattheir scope is limited to excluding supplemental or contradicting extrinsicevidence. On the other hand, these clauses should not affect the interpretation of the contract where extrinsic evidence is admitted to show theeffects to be given to the contract terms of the written contract. Theseinternational restatements may have persuasive authority in civil litigationbefore national courts and, thus, they may affect the interpretation to begiven to entire agreement clauses under the national law applicable to thecontract. Furthermore, under modern arbitration laws characterized byfreedom for arbitrators to rule on means and admissibility of evidence,both principles may be invoked by parties and applied by arbitrators to doaway with the parol evidence rule and to uphold the binding effect ofentire agreement clauses.

It is perhaps preferable to avoid these problems in international contract practice rather than have them solved in litigation or arbitration whileinvoking the Unidroit or European Principles. Quite dramatically, mostentire agreement clauses do not precisely reflect what functions partieswant to attribute to them. Neither do they provide for indications as totheir substantive or procedural nature. The analysis above has indicatedthat major legal systems have no problems with the enforceability of entireagreement clauses as agreements to substance, as evidence agreements oras both substance and evidence provided the entire agreement only purports to exclude additional and/or contradicting terms. If so, the questionarises why these clauses generally do not reflect this function any better.

When entire agreement clauses are not drafted precisely to cover onlythe issue of additional and contradictory terms, the risk arises that they areinterpreted in civil law jurisdictions to address other issues such as solvingambiguities, filling of gaps or imposing obligations by implication. Anysuch-mistaken-interpretation causes an unnecessary clash between themore substantive approach of civil law countries, which questions theeffects of these poorly drafted entire agreement clauses, and the procedural perspective of the common law, under which these clauses tend to beinterpreted restrictively and are deemed binding and to have the intendedexclusionary effects.

99 On all these aspects, see A. Hartkamp, Formation of Contracts According to thePrinciples of European Contract Law, Festskrift til Ole Lando, Papers dedicated to OleLando, Copenhagen, Gadjura, 1997, 180.


Since there is no case law and scant literature on these issues, theanalysis must remain tentative and provisional. The general conclusion isthat-perhaps with the exception of English style jurisdictions andAmerican law-entire agreement clauses aiming at excluding pre-contractual documents and evidence, which may establish terms contradicting or adding to the written terms of the contract, have not yet been testedand that, therefore, they may not work out to be as rigid as would appearfrom reading these clauses. However, a few guidelines may be added tothis cautious conclusion. First, the specific wording of the entire agreement clause should be taken as the starting point of any analysis since theresearch has shown some variety in the way these clauses are drafted.Secondly, there may be a significant difference in attitude to these clausesbetween arbitration and court litigation. Thirdly, the consequences to beattached to these clauses to a large extent depends upon their characterization as substantive or procedural. Fourthly, the law applicable to theseclauses also affects their interpretation.

In practice, the implication of this analysis probably is that most entireagreement clauses copied from contracts governed by the rules of a common law jurisdiction are ambiguous or at the least unclear to the mind oflawyers trained in civil law jurisdictions and, thus, unfit to be used if theapplicable law is the law of a civil law jurisdiction. Therefore, most clausesare to be re-drafted in order to be adaptable in a civil law context or to beable to be used as a boilerplate clause in international contracts irrespective of the fact whether the governing law is the law of a common or civillaw country. Re-drafting would then permit covering the functions partiesintend the clause to have and to express whether the clause is to have substantive or procedural content. Subsequently, the re-drafted provision is tobe scrutinized against the law applicable to the contract or, alternatively,the provision is to be drafted in a way that is compatible with the law inmost jurisdictions. The latter would imply that the clause is not to bedrafted as an evidence clause because in some jurisdictions, there is doubtas to the validity of any such clause. Entire agreement clauses must focusmore on their functions and effects and less on their Anglo-American origin. Stating that a contract constitutes the entire agreement between theparties does not help; neither does it help to say that the written contractsupersedes prior and contemporaneous terms. From a civil law perspective,it is better to draft the clause in such a way as to express that terms agreedupon by the parties, which add to or contradict the written contract terms,will be ineffective or are deemed to have been waived. One might add that,to the extent permitted by the applicable law, the contract in writing shallconstitute conclusive evidence between the parties and that no other evidence shall be admitted to establish terms adding to or contradicting theagreement in writing.


Finally, it should be noted that the application of entire agreementclauses may be waived expressly or by conduct. Often non-waiver clauseswill attempt to shield entire agreement clauses from the application ofwaiver doctrines (see further Section lILH).

4. Exclusion of Written or Oral Representations

Fourthly, entire agreements may intend to shield against actions by oneof the parties to have the contract declared null and void on the basis of misrepresentation or mistake. In practice, any such clauses may be important toavoid complex transactions that are attacked on these bases by a party intending to go back on its contractual promise and exposing the other party tohigh costs and uncertainty. Such clauses might read as follows:

• "This Agreement, together with any agreements and other documents to be delivered pursuant or concurrently hereto constitutesthe entire agreement between the Parties pertaining to the subjectmatter hereof1oo and supersedes all prior agreements, negotiations,discussions and understandings, written or oral, between Parties.There are no representations, warranties, conditions, other agreements or acknowledgments, whether direct of collateral, expressedor implied, that form part of or affect this Agreement. The execution of this Agreement has not been induced by, nor do either of theParties rely upon or regard as material, any representations, warranties, conditions, other agreements or acknowledgements notexpressly made in this Agreement or in the agreements and otherdocuments to be delivered pursuant hereto."

• "Complete Agreement. This Agreement, together with all otheragreements contemplated hereby, constitute the complete andexclusive statement of the agreement between the Partners andreplace and supersede all prior agreements, by and among thePartners or any of them. This Agreement supersedes all prior written and oral statements and no representation, statement, conditionor warranty not contained in this Agreement shall be binding on thePartners or have any force or effect whatsoever except as set forth inthis Agreement or in any other agreement contemplated hereby."

100 The following clause is somewhat broader, since it does not only cover priorarrangements pertaining to the subject matter of the contract but also to matters connected therewith:

"This Transfer and Assignment Agreement and Consent constitutes theentire agreement between the parties hereto and supersedes and cancels anyand all prior representations, negotiations, undertakings, letters, acceptances,agreements, understandings and contracts whether verbal or writtenbetween the parties hereto or their agents solely with respect or in connection with any of the matters or things to which this Transfer andAssignment and Consent applies or refers."


• "The parties hereto further acknowledge and agree that, in entering into this Agreement and in delivering the schedules, documents and instruments to be delivered on or before the ClosingDate they have not in any way relied, and will not in any way rely,upon any oral or written agreements, representations, warranties,statements, promises, information, arrangements or understandings, express or implied, not specifically set forth in this Agreement or in such schedules, documents or instruments."

These clauses have frequently been found in merger and acquisitioncontracts where the value of the transaction is based upon due diligencereports and an audit of the company to be merged with or to be acquired.In the course of the audit, many documents may be reviewed by the auditteam (for instance in a data room for reasons of confidentiality). Thus, disclosure duties by either party (in case of a merger) or by the seller (in caseof an acquisition) are replaced by investigation duties by the counter-party.The system intends to shield the transaction from attack as to its validity oras to price or exchange correction based on mistake or misrepresentationsave for those representations that are expressly stated in the representation and warranties part of the written agreement. Entire agreeementclauses purport then to exclude any other oral or written representationsor any documents or other evidence on which a representation might beconstrued.

Some clauses go further and add the effects of these clauses to theeffect that mistake and misrepresentation cannot entail rescission of thecontract or give rise to tort liability:

"Each party further agrees and undertakes to the other that nobreach of this agreement shall entitle it to rescind this Agreement,and that its remedies for any breach of this Agreement shall besolely for breach of contract, which remedies shall be subject toand in accordance with the provisions of this Agreement."

Finally, some exceptions may be provided such as fraudulent misrepresentation:

"This agreement and its schedules constitute the entire agreementmade between the parties. It supersedes and replaces all otheragreements whether in writing or otherwise with regard to thesame subject, including the memorandum of understandingexchanged by the parties and dated 13 October 1999. Nothing inthis agreement shall operate to exclude liability in respect of fraudulent misrepresentation."


These clauses may be helpful indicators to help block actions to nullifYthe contract. They may be more easily enforceable under the common lawthan in civil lawjurisdictions. For instance, there is English case law statingthat any such clause is generally valid but that it is to be interpreted in arestrictive way. Therefore, if the parties have intended that the contractcannot be nullified or that no other remedies (such as tort remedies)should be available, this should be expreSSly stated in the clause.IOl

In civil law countries, it is unclear whether the contracting parties may,by contract, regulate the formation process of contracts. A traditional theory advocates that the rules on formation are mandatory to protect contracting parties against abuses from the other party and, that therefore anysuch clause would be invalid. 102 A more liberal camp argues that somecontract formation rules are dispositive and that the parties may derogatefrom these rules. 103 This conception did find its way to the new Dutch CivilCode (Article 217 (2) Book 6 providing that the parties may derogate fromcontract formation rules), but that does not extend to misrepresentation.Similarly, Article 6 of CISG (the 1980 Vienna Convention on the International Sale of Goods) stipulates that the parties may opt out of theentire Convention or of parts thereof. This also relates to the rules on formation of sales contracts. However, pursuant to Article 4 CISG, Article 6does not apply to national rules regarding the validity of contracts whereCISG is silent. The modern conception, however, does not yet seem to berelevant for purposes of the application of doctrines of mistake and misrepresentation where the law still seems to be, by and large, mandatory.However, Article 3.19 of the U nidroit Principles and Article 4: 118 PECLare paving new ways regarding their non-mandatory rules on mistake andmisrepresentation.

101 AGJ. Berg, op. cit., 172; R. Christou, Boilerplate: Practical Clauses, 2nd ed., London,FT Law & Tax, 1995, pp. 179-185 (citing two unpublished decisions one of which hasbeen published since, see Willer Llrlv. TBP Iruluslries, [1996] 2 All E.R. 573 (ChanceryDivision, Jacob J, July 15, 1994). In a recent case (Grirnslearlv. McGarrigan [1999] Courtof Appeal), it was held that the combination of written exhaustive representations andan entire agreement clause is reasonable in commercial transactions and may precludea claim based on misrepresentations not contained in the written contract (see Bakerand McKenzie Commercial Law Newsletter,Janury 2000).

102 For Belgium, see for instance G. Baeteman, Les effets des dispositions legalesimperatives protegeant des interets prives, case note under Belgian Supreme Court,December 6, 1956, R.CJ.B., 1960, p. 164.

10" See R. Moser, Verlragsabschlu:fJ, Verlragsgi1lligkeil uruJ Parleiwille irn inlernalionalenObligationenrecht, St. Gallen, Fehr, 1948, pp. 101-127; W. Lorenz, Contribution, inRicordando Gino Gorla, Centro di studi e richerche di diritto comparato e straniero,Saggi, conferenze e seminari No.6, Rome, 1993, p. 12.


The type of entire agreement clauses discussed in this section maytherefore have more factual than legal relevance. These clauses make itmore difficult for a claimant to convince a judge or arbitrator that it wasled by a mistake or misrepresentation because, under the contract, thatparty acknowledged that there were no other representations than those ofthe contract. The ambit of representation can thus, de facto, be reduced tothe expressly worded representations contained in the contract. By virtueof the clause, there would be less room to invoke oral representation orrepresentations given in documents other than the contractual documentsexcept in case of fraud or when the one party was under an obligation toinform the other and the scope of that information duty cannot validly belimited to the contractual representations.

In sum, this fourth category of entire agreement clauses may have factual dissuasive force but its legal status in many jurisdictions is still uncertain if not doubtful.

5. Exclusion of General Conditions: Blocking Clauses

Entire agreement clauses may also function as blocking clauses (clausesde defense, Abwehrklauseln) against general conditions. The problem of conflicting general conditions (battle offorms) and the variety of answers incomparative law is widely known104 and causes uncertainty in internationaltrade. However, if contracting parties are in a standing business relationship with one another under a distributorship, license, franchising or construction contracts where there is a main contract and implementing oradditional contracts, the manufacturer, licensor, franchisor or contractormay attempt to exclude the application of the general conditions of theother party by means of a blocking clause in the entire agreement clauseof the main contract. Often, these clauses are one-sided in favor of theparty having the strongest bargaining position, but one example has beenfound of a symmetric clause in a distributorship contract:

"This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and in particular theexclusion of any standard conditions of sale of purchase of eitherparty and may not be modified except by an Instrument in writingsigned by the duly authorised representative of each party."

All these clauses do not seem to create m~or problems regarding theirvalidity and application. It is legitimate for the parties to determine the

104 Dutch law has the first shot theory where as English law the last shot. France,Belgium and Germany have the principle that conflicting general conditions cancel oneanother to the extent of the conflict. The UCC and Article 19 CISG have a mixed theory distinguishing between material and non-material deviations between offer andacceptance.


scope of their contractual duties not only positively by defining the contractual documents (see Section B.3) but also negatively by excluding general conditions that may contradict or supplement the contract. However,these blocking clauses only seem to cover and protect the scope of the contract in which they are contained, but do not solve the problem of a battleof forms between the general conditions of both parties as to the implementing or additional contracts. If any such effect is desirable, a moreextensive blocking clause would be required such as the following:

"Entire Agreement

Seller and Distributor agree that above terms and conditionsincluded in the Attachements and the terms and conditions inSeller's order acknowledgement form, if any, or as changed ormodified in the future at seller's discretion, are the only terms andconditions of the distributorship and of the sale by the Seller andpurchase by Distributor of the Products and that the terms andconditions of this Agreement and of Seller's order acknowledgements form shall override any terms and conditions stated in anyorder or acknowledgements forms or any other document supplied by Distributor.Seller shall not be bound by any terms, conditions or prices statedin the Distributor's purchase orders, acknowledgements forms orother documents which vary, limit or add to the terms, conditionsor prices of this Agreement."

Any such clause may be binding on the same contracting parties forlater contracts provided the formation of these contracts does not indicatethat the blocking clause had been waived by one of the parties.

6. Exclusion of Future Contracts and Documents

Contracts can not only be followed by contracts under which generalconditions are used but also by implementing, ancillary or other contractsor by other documents that may vary the contract. Here too, contractdrafters do not want their contract to be affected by implementing, ancillary or other later contracts or documents. For instance:

• "Toute divergence par rapport aux termes et conditions du presentcontrat et de toute annexe y relative qui serait contenue dans toutbon de commande ou toute autre notification ecrite de la partie Asera nulle et non-avenue."

• "It is expressly agreed that if Client issues a purchase order orother document for the products and services provided under thisAgreement, such documents will be deemed to be for Client'sinternal use only, and the terms and conditions of this Agreementshall supersede any provisions therein."


In both these cases, one party intends to provide for a contractual protection against any variation of the contract by the other party. lOG However,one could also draft clauses in a more symmetric way.

This category of entire agreement clauses does not create specificproblems, and these clauses generally will be upheld and be declared binding and enforceable unless it appears that any such clause has beeninserted as a boilerplate and does not fit within the letter or the spirit ofthe contract. Implementing or ancillary contracts are often related to earlier framework contracts and will be held not to constitute completely different contracts but are implementing or ancillary to the main contractdepending also on the provisions of that contract. In other cases, the position may be weaker if modifications have been proposed and performancetook place in accordance with the proposed modifications. These clausesin practice-under certain circumstances and subject to the applicablelaw-may be considered to have been waived if performance appears toconflict with the letter of the clause.

In practice, these clauses pursue objectives similar to NOM- and nonwaiver clauses in that they attempt to freeze the contract into the writtenform existing upon conclusion (see Sections III.G and III.H). It may be recommended to draft these clauses purporting to exclude future contracts ordocuments in the context of such NOM- and non-waiver clauses since theyare the flipside of the same coin. Since the parties do not intend to havethe contract modified in an informal way by future contracts or documents,any such variation should be expressed in writing in accordance with theprovisions of the NOM-clause. Also, parties want to protect themselvesagainst variation by conduct, for instance by not objecting to future documents and contracts. The non-waiver clause fulfills just that objective.

As a general conclusion to entire agreement clauses, parties shouldfirst clearly identify the different objectives they may have in mind regarding these clauses. In a boilerplate clause, the six functions mentioned earlier should be considered. Secondly, in international contracts, one needsto be aware of the different meanings and approaches these clauses mayhave in different jurisdictions, particularly contracts between parties coming from civil and common lawjurisdictions. Thirdly, the entire agreementclause is to be scrutinized against the background of the law applicable tothe contract. Finally, most clauses encountered in the analysis seem to bein need of reconsideration and re-drafting when they are to be used in thecontext of a contract governed by the law of a civil lawjurisdiction becausethese clauses are not properly understood in these jurisdictions.

105 These clauses are to be distinguished from clauses giving one party a unilateralright to change some elements of the contract (see R. Christou, op. cit., pp. 184-186).


D. Heading Clauses

Entire agreement clauses in their multiple functions attempt to freezethe contract in its written form. Once the contract has been so defined, theinterpretation process may begin to solve ambiguities, gaps and internalcontradictions. In the interpretation process, one looks first to the literalmeaning of contract clauses. The research has indicated that contractshardly provide anything to help literal interpretation. The next step is looking at context. In that respect, the structure of the contract is used as a context for interpretation.

One element in this respect is the interpretative value of headings(intitules). Before analyzing that question, the question should be answeredas to why contracting parties use headings preceding their contract articles.The reason is twofold and of a contract management nature. First, headings summarize contract provisions and thus, the contract is made userfriendly because one can easily find the relevant contract clauses in lenghtycontracts without having to read them from beginning to end. This reference objective of headings is not only important for contract drafters butalso for all the people (present and future) in a company who may have togo through the contract documents. Third parties such as banks financingcontracts, governments involved in the process of permits or credit insurance companies may benefit from headings. Second, headings are essential in making tables of contents of contracts and the heading thusrepeated in the table of contents serves the same reference function as theheadings preceding the contract articles.

From a legal point of view, the question arises whether these headingsmay help to interpret contracts. Under the different interpretation theories found in different jurisdictions (see Section II), the answer is positive.Under the English approach, headings may be part of the literal interpretation process. Under the subjective theory, they may form indications ofwhat the parties wanted and under the objective theory they are also elements to determine the rights and obligations of the parties.

However, in international contract practice lOG one notes a frankly hostile attitude against giving interpretative value to headings.I°7 This is prob-

106 In legislation headings are also used, for instance in Switzerland and the UnitedStates and maybe used for legislative interpretation (for the United States, see UCC §1-109).

107 This hostile attitude is also confirmed by the FIDIC contracts where the Red Bookprovides:

"1.2 The headings and marginal notes in these Conditions shall not bedeemed part thereof or be taken into consideration in the interpretation orconstruction thereof or of the Contract." (Clause 1.2 of the Conditions of


ably due to the fact that contract drafters want to be protected againstthemselves and prefer to exclude from the outset any interpretative value,inspired by fear of inconsistencies between the clause and its heading andthe partial and summary character of the heading. Many contracts expressthese concerns and contain almost identical language stating:

• "Les titres d'articles ne font pas partie du Contrat et ne sont mentionnes qu'a titre indicatif."

• "Descriptive HeadingsThe descriptive headings of the various clauses of this Agreementare inserted for convenience only and do not constitute part of thisAgreement."

• "Headings and Table of Contents. The headings to all Sections andsubsections, the Table of Contents contained in this Agreementand all Exhibits thereto, shall not form a part of this Agreement orExhibits, but shall be regarded as having been used for the convenience of reference only."

• "Headings of the ClausesThe headings or titles of the Clauses of this Agreement do not constitute a part thereof, their inclusion serving only to facilitate itsuse."The clauses above merely indicate that headings and table of contents

are not a part of the contract in the sense that the parties did not want tocreate contractual rights or obligations. However, there may be some doubtwhether these clauses may be construed to exclude the interpretative valueof headings and table of contents. The following clauses are, therefore,preferable because they clearly take a position regarding the interpretativestatus of headings and table of contents:

• "Captions and Headings. The section and paragraph captions andheadings contained in this Agreement are for included referencepurposes only and shall not affect in any way the meaning or interpretation of this Agreement."

Contract for Works of Civil Engineering Construction-The Red Book,FIDIC, Lausanne, 4th ed., 1989).

Similar provisions may be found in clause 2(i) of the Client/Consultant ModelServices Agreement-The White Book, FIDIC, Lausanne, 2nd ed., 1991; clause 1.2 ofthe Conditions of Contract for Electrical and Mechanical Works-The Yellow Book,FIDIC, Lausanne, 3rd ed., 1988; clauses 1.2.1 and 1.2.2 respectively of FIDIC's SubConsultancy and Joint Venture (Consortium) Agreements, FIDIC, Lausanne, 1994;clause 1.2 of the Conditions of Subcontract for Works of Civil Engineering Construction,FIDIC, Lausanne, 1st ed., 1994; clause 1.2 of the Conditions of Contract for Design-Buildand Turnkey-The Orange Book, FIDIC, Lausanne, 1st ed., 1995. Adde the four new1999 standard form of contracts published by FIDIC and mentioned supra, note 1.

One may add that international financial organizations such as the World Bank alsohave these heading clauses in their contracts.


• "Headings. The section headings used herein are inserted only asa matter of convenience of reference, and in no way define, limitor describe the scope of this Agreement or the intent of any provision thereof."

• "Headings. All headings herein are inserted only for convenienceand ease of reference and are not to be considered in the construction or interpretation of any provision of this Agreement."

There is scant doubt as to the validity of any such clauses,108 but onemay question whether and to what extent these clauses will be effective injurisdictions following the objective theory, where judges may engage morein judicial activism regarding interpretation because it is a legal issue andbecause party autonomy is only one criterion in contract interpretation andcertainly subject to court intervention in cases of abuse. The hostile andunqualified nature of these clauses has been criticized, and the questionhas been raised whether exceptions should not be formulated in draftingthese clauses. A general reservation may be advisable to preempt the automatic operation of these clauses. For instance, one might provide thatheadings and table of contents are inserted for convenience and referenceand shall not affect the construction of the contract or of any of its provision unless such construction leads to unequivocal conclusions. A positiveformulation might read that headings and table of contents are insertedfor convenience and reference and may be considered in the constructionof the agreement or of any of its provisions provided it does result in unambigous conclusions.

E. Definition Ciauses109

Interpretation problems can, to a large extent, be avoided if terminology is properly defined and consistently used. If a term is used once in acontract clause, the definition of that term may be placed in that same provision. For instance,

"For the purposes of this clause the expression "Material Breach"means ..."

If terms are used often in a contract, one may consider having a definition clause at the beginning of the contract. Again, this technique is usedin order to increase the user-friendliness of contracts but also to avoid differences of opinion regarding key concepts.

108 In an unpublished ICC Interim Arbitral Award dated March 7, 1994 (Case 7273),a heading clause denying legal effect to the wording of the heading was applied by thearbitral tribunal. The parties during negotiations had contemplated arbitration andinserted this in the heading. However, the final contract did not contain an arbitrationclause while the heading still referred to arbitration. The Tribunal held that, on thatbasis alone, it could not accept jurisdiction.

109 See also M.H. Maleville, op. cit., pp. 74-83.


Two different classes of definitions can be distinguished. First, thereis the definition of grammatical concepts:

• "Gender/Number. Whenever the context of this Agreement sorequires, references of the masculine gender shall include the feminine or neuter gender and corporate or other such entities, thesingular number shall include the plural and vice versa, and reference to one or more parties hereto shall include all assignees ofthat party."

• "Interpretations 1.3 Words importing persons or parties shallinclude firms and corporations and any organisation having legalcapacity."110

• "Singular and Plural 1.4 Words importing the singular only alsoinclude the plural and vice versa where the context requires."lll

Second, concepts typical or relevant for the contract concerned will bedefined. These definition clauses can be very long and, in one contract,related to the sale of a business division, the definition clause took 14 pagesdefining some 98 different concepts. The purpose of this analysis is to lookto the introductory provisions of these definition clauses. The first categorycontains the simple and straightforward introductory phrases such as:

• "Definitions. Throughout this Agreement, the following termsshall have the following meanings: ..."

• "Definitions 1.1 In the Contract (as hereinafter defined) the following words and expressions shall have the meanings herebyassigned to them: ... "112

110 Conditions of Contract for Electrical and Mechanical Works-The Yellow Book,FIDIC, Lausanne, 3rd ed., 1988 (clause 1.3); Conditions of Contract for Works of CivilEngineering Construction-The Red Book, FIDIC, Lausanne, 4th ed., 1989 (clauses1.3); Conditions of Subcontract for works of Civil Engineering Construction, FIDIC,Lausanne, 1st eel., 1994, (clause 1.3); Conditions of Contract for Design-Build andTurnkey-The Orange Book, FIDIC, Lausanne, 1st ed., 1995 (clause 1.3). Addethe 1999four new FIDIC standard forms of contract cited supra, note 1.

111 Conditions of Contract for Works of Civil Engineering Construction-The RedBook, FIDIC, Lausanne, 4th eel., 1989 (clauses 1.4); Conditions of Contract for Electricaland Mechanical Works-The Yellow Book, FIDIC, Lausanne, 3rd eel., 1988 (clauses 1.3).For similar provisions, see Clause 2 (ii) of the Client/Consultant Model ServicesAgreement-The White Book, FIDIC, Lausanne, 2nd ed., 1991; Guide to the use ofFIDIC's Sub-Consultancy andJoint Venture (Consortium) Agreements, FIDIC, Lausanne,1994 (clause 1.2.2 of the Sub-Consultancy Agreement and clause 1.2.1 of the Joint Venture(Consortium Agreement); Conditions of Subcontract for works of Civil EngineeringConstruction, FIDIC, Lausanne, 1st ed., 1994, (clause 1.4); Conditions of Contract forDesign-Build and Turnkey-The Orange Book, FIDIC, Lausanne, 1st ed., 1995 (clause1.3). Adde the 1999 new FIDIC standard forms of contract cited supra, note 1.

112 Clause 1.1 of the Conditions of Contract for Electrical and Mechanical WorksThe Yellow Book, FIDIC, Lausanne, 3rd ed., 1988.


However, substance may dictate that the same concept is used in different meanings. The following clause provides for that situation and addsa qualification to the sweeping nature of a definition clause:

"In this Agreement unless otherwise stated:

Confidential Information means ...

Goods mean ..."

Many definition clauses, however, do not refer to an exception to thedefinition to be provided by the drafters but to an exception based on context that, ultimately in case of a dispute, is to be determined by a judge orarbitrator:

"Definitions. In this Agreement, including the recitals, unless thecontext otherwise requires, the following words and expressionsshall mean: ... "113

This reference to context may generally be welcomed because it protects against automatic applications of definitions and because it bringsthese definition clauses more in line with subjective and objective interpretation theories of applicable national laws thereby avoiding clashesbetween the applicable law and the contract clause.

Sometimes, in groups of contracts, a definition clause refers to definitions of another contract as is the case in this definition clause of a sub-contract referring to the main contract:

"Definitions 1.1 In the Subcontract (as hereinafter defined) allwords and expressions shall have the same meanings as are respectively assigned to them in the Main Contract (as hereinafterdefined), except where the context otherwise requires and exceptthat the following words and expressions shall have the meaningshereby assigned to them: ... "114

This may raise the problem of conflicting definitions where the following clause provides the answer in giving a priority rule:

"Words and expressions defined in the Contract shall, unless thecontext otherwise requires, have the same meanings in this

113 All the FIDIC Conditions cited supra, note 1, except for the Yellow Book clausecited in the previous note have a similar provision.

114 Clause 1.1 of the Conditions of Subcontract for Works of Civil EngineeringConstruction, FIDIC, Lausanne, 1st eel., 1994.


Agreement; provided that if the same term is defined both in theContract and in this Agreement, it shall, for the purpose of thisAgreement, have the meaning set out in this Agreement."

Definition clauses may also attempt not so much to define conceptsbut to describe the contents of a concept by giving an enumeration ofevents or circumstances falling within the concept. The key issue is thento determine whether the contractual enumeration is exhaustive orexemplary. Contract clauses better avoid interpretation problems thatmay, for instance, arise in common law jurisdiction by operation of therule expressio unius exclusio alterius or of the eiusdem generis rule by clearlystating the nature of these enumerations by wording such as "includingbut not limited to."

Definition clauses may be very helpful in defining key concepts andwarrant consistency. There is a growing tendency to have very extensive definitions clauses, and one may ask whether all the concepts defined reallyneed definition. Common sense is in order, and drafters should alwayscarefully review whether they have not forgotten key concepts in their questfor detail perfection and completeness.

Generally, definitions will bind judges and arbitrators in English stylejurisdictions and in countries following the subjective contract interpretation model. 115 In objective model jurisdictions, courts will take the definitions seriously but may depart from them if the context were to require so.

Finally, it is recommened that definition clauses should refrain fromcreating contractual rights and obligations. A strict division between definition clauses and substantive clauses avoids confusion and enhances theconsistency of the contract.

F. Language Clauses

International contracts, by their very nature, may often involve partiesspeaking different languages. This raises the sometimes delicate questionof the language of the contract and the communication language of theparties.I 16 International contract practice also has dealt with these issues.The following is an example of a language clause setting forth the languageof the contract immediately followed by a translation into the language ofthe other party:

115 For France, see M.H. Maleville, op. cit., p. 80.

116 See J. Gruber, AuslegungsfJTobleme beifrerrulsf)rachigen Verlriigen unler deuJschem Rechl,DZWir 1997, pp. 353-359.


"The Parties have expressly required that this Agreement and alldocuments and notices relating hereto be drafted in English. Lesparties aux presentes ont expressement exige que la presente convention et tous les documents et avis qui y sont afferents soientrediges en langue anglaise."

This clause had been inserted in a contract where one party had itsplace of business in Quebec and this kind of clause may be found particularly in multi-lingualjurisdictions such as Canada, Belgium or Switzerland.

If several language versions of the same contract are made, the question is how discrepancies between the different versions are to be solved.Many clauses have provisions to that effect, which may also reflect the bargaining positions of the parties. For a case where both versions control, seethe following example:

"Languages and CounterpartsThis Agreement is signed in two sets of original copy in bothEnglish and Chinese. Each Party shall retain one set of originalcopy. Each copy will have the same legal validity."

These clauses may cause problems because they do not solve eventualdiscrepancies between the equally binding language versions. An answermay be found in the following clause:

"This Agreement has been executed by the parties in two originalcounterparts, one in French and the other in the English Language.In the event that one of the counterparts should differ from theother and the parties cannot in good faith agree on a commoninterpretation, the matter shall be settled by arbitration in accordance with Article 13 hereof."

However, most contracts have a priority rule defining the rulinglanguage: 117

• "LangueLa langue de la presente Convention et de ses Annexes ainsi quede toute correspondance qui en sera la suite est Ie fran<;ais. Si destraductions en d'autres langues etaient necessaires, seulle textefran<;ais ferait foi.Tous les documents, autorisations ou autres qui doivent etre remisau Chef de File dans Ie cadre de la presente Convention et dont

117 See also the FIDIC Conditions cited supra, note 1 which all have provisions concerning the language versions of the contract and the day-to-day language for the contract works or services.


les originaux ne seraient pas en langue fran<;aise devront etreaccompagnes d'une traduction emanant d'un traducteur jure, si IeChef de File en fait la demande."

• "Texte authentique:Au cas OU Ie texte de ce present Contrat existerait dans une langueautre que Ie fran<;,:ais, la version fran<;,:aise prevaudra sur toute autreversion."

• "Authentic textShould the text of this Agreement exist in other languages thanthe English one, the present English version shall prevail over allother language versions."

• "Section 17: LanguageThe official language of this Agreement is English, and theAInerican usage thereof shall control the interpretation and construction of it and of all other writings between Sand B. In theevent of a discrepancy in translation of this Agreement, the Englishlanguage version shall be controlling."

The following clause is a diplomatic and elegant way to emphasize theequality of the parties and of their languages and presents the issue of solving discrepancies as a pragmatic one:

"This Agreement shall be executed in both the English and theSpanish language. The English and Spanish texts shall both bevalid, provided that in the event of any discrepancy and the resolution of a dispute the English text shall prevail."

Some clauses also give insights as to the reason why one language version controls the other one:

• "The translation of these general terms of sale has been made forBuyer's facility; in case of dispute concerning the interpretation ofthese terms, only the enclosed French text is valid."

• "These general terms and conditions were originally drawn up inthe Dutch language and in case of any difference between Dutchand translated versions, the Dutch version is ruling."

These language clauses work automatically and do not provide forexceptions or qualifications. The priority rule is established immediately incase of a conflict between the two language versions. One wonders whetheran intermediate step might not be advisable. With that approach, the different language versions are mutually explanatory and the ruling languageonly prevails if mutual explanation fails. llS These intermediate solutions,

118 In this regard, experience from muItilinguistic jurisdictions such as Belgium,


again, may reduce tension between language clauses and national laws, primarily those based on the objective theory that may be tempted to intervene in the interpretation process by using the non-ruling language incontravention of the language clause.

G. NOM-Clauses (No Oral Modification Clauses)

Once a written contract has been made, circumstances and situationsmay arise that require that the contract be changed. In manyjurisdictions,there is no need to have commercial contracts in writing and modificationsare thus also not subject to a written form. 119

From Section III.C on entire agreement clauses, the conclusion wasthat contracting parties spend a lot of effort in reducing all arrangementsto one written document and attempt to concentrate all these arrangements in one single document. This contract management concern is legitimate but may be frustrated if, subsequently, oral contracts are concludedbetween the parties that deviate from the written contract or if writtenamendments are made by unauthorized employees.

For that reason, no oral modification clauses (hereafter referred to asNOM-clauses) have been developed that provide a parallel formalismregarding changes to the written contract and require that amendments bemade in writing. 120 NOM-clauses are, in a way, the complement of entireagreement clauses. However, if the parties do not see any need to insert anentire agreement clause into their contract, NOM-clauses may still be veryuseful in order to force the parties to record amendments in writing. Theseamendments may then be filed with the original contract and complete the

Canada and Switzerland as to the interpretation of legal texts in different languages maybe useful.

119 There are exceptions to this rule in some Latin American countries, in someCentral and Eastern European countries and under Statutes of Frauds in some commonlaw jurisdictions. Furthermore, some particular clauses in commercial contracts such asforum selection clauses and arbitration clauses may be subject to a requirement of beingin writing. Under ClSG, there is no requirement as to sales contracts being in writing(Articles 11 and 29) but countries may make a stipulation under article 96 to that effect.Finally, some requirements may affect the validity of the contract, whereas other requirements only relate to evidence.

120 No oral prolongation clauses (NOP-clauses), under which a fixed term contractcan only be extended in writing, are similar to NOM-clauses. For an application of sucha clause by the European Court ofJustice as to forum selection under Article 17 of theBrussels 1968 Convention on Jurisdiction and Enforcement (now Article 23 ofRegulation 44/2001) where it was held that, subject to the applicable law, a forum selection clause in the original contract meeting the requirements of Article 17, may beextended to later contracts which were renewed without observing the contractualrequirement ofa written statement (ECJ, November 11,1986, lveco Fiat/Van Hool, ECR1986, 3337).


contract file necessary for contract management purposes and guaranteecontinuity in the contract or legal department.

The ICC Model Agency and Distributorship Contracts may be cited asexamples of NOM-clauses: 121

"Article 26.2. No addition or modification to this contract shall bevalid unless made in writing. However a party may be precluded byhis conduct from asserting the invalidity of additions or modifications not made in writing to the extent that the other party hasrelied on such conduct."

Other examples:

"ModificationsToute modification de la presente Convention et de tout autredocument s'y rattachant devra faire l'objet d'un accord ecrit desparties."

Next to these simple clauses, there are some more sophisticated clausesthat have provisions as to who has to sign the modification contract, theform it should take, the date of its entry into force or a requirement thatreference be made to the original contract:

• "AmendmentNo amendment or other variation of the Contract shall be effective unless it is in writing, is dated, expressly refers to the Contract,and is signed by a duly authorized representative of each partyhereto."

• "ModificationsAny modifications or amendments to the CONTRACT will bemade by RIDER in writing to the CONTRACT."

• "This Agreement contains the entire agreement between the parties and it cannot be altered or amended unless by mutual consentand in writing. Any alterations or amendments agreed uponbetween the parties shall stipulate the date as from which theybecome effective."

NOM-clauses also attempt to protect companies against changes proposed and agreed upon between the other contracting party and any of thecompanies' employees, officers, sales representatives or agents not having

121 For other examples, see Article 1.5 of the ICC Model International Sales Contract,ICC Publication No. 556, Paris, ICC Publishing, 1997; Guide to the Use ofFIDIC's SubConsultancy and Joint Venture (Consortium) Agreements, FIDIC, Lausanne, 1994(clause 2.5 of the Sub-Consultancy Agreement).


authority to bind the company. In these cases, the clause intends to shieldthe company from being bound by virtue of arguments related to apparentauthority (mandat appar-ent) and estoppel. Only a minority of the clausescovered these cases explicitly and it would be advisable that NOM-clausesalso address these issues in much more detail.

In one clause, an exception was provided where an oral modificationwas permissible, probably regarding a minor item:

"This Agreement cannot be changed or terminated orally with thesole exception that cities may be added to and/or deleted fromthe list of cities in Exhibit A by oral agreement of the partieshereto."

The merits of NOM-clauses have already been emphasized. They haveincreasingly been used and found their way into some national laws andinto codified uniform law. As to the former, during the research no statutory provisions or case law regarding NOM-clauses has been found in civillaw jurisdictions.I 22 Under the subjective theory of interpretation prevailing in France and Belgium, NOM-clauses seem to be binding unless it canclearly be shown that parties have renounced it, whereas under the objective theory prevailing in Germany or The Netherlands it will be more easily accepted that one party waived his right to invoke the NOM-clause byagreement or by conduct or is acting in an unreasonable way (Rechtsverwirkung). In relation to Germany, there is the additional complication thatarises if the variation to the contract is communicated to the other party bymeans of a merchant's confirmation note (kaufmannische Bestatigungsschr-eiben). The question is then to know whether the NOM-clause or theconfirmation note should prevail.

With regard to the common law, there are some specific elements inthe United States regarding NOM-clauses that briefly will be summarized.Traditionally, the common law accepted that written contracts, subject toStatutes of Frauds, could be varied orally based on the argument that theparties could change a contract at any time after a contract had been concluded, including the NOM-clause contained in any such contract. Theparol evidence rule is not applicable to these cases since it only precludesevidence regarding prior, not subsequent terms. However, in Section 2-

122 Two exceptions may be noted. First, Swedish law would seem to take the sameapproach as ClSG, see J. Ramberg, The New Swedish Sales Law, in Centro di studi ericerche di diritto comparato e straniero, Saggi, conferenze e seminari, 28, Roma, 1997,7-8. Secondly, under German law, Section 9 of the Statute on General Conditions (nowSection 307 BGB) restricts the use of NOM-clauses (see for instance, German SupremeCourt, February 15, 1995, NJW 1995, 1488). This provision is also applicable to commercial transactions, provided the applicable law is German law.


209 (2) UCC, this position was changed in sales contracts, and under thatnew provision a signed agreement, which excludes modification except bya signed writing, cannot be otherwise modified. A waiver rule was added tothis provision (Section 2-209 (4) UCC) .1 23

As to uniform law, Article 29 clse provides in Article 29 (2), first sentence that a contract in writing, which contains a provision requiring anymodification or termination by agreement to be in writing, may not be otherwise modified or terminated by agreement. The second sentence ofArticle 29(2) makes this rule subject to a waiver provision, which will be discussed below (see under Section III.H). Thus, Article 29 clse recognizesthe use of NOM-clauses in international trade. 124 Article 29 clse also setsthe trend for Article 2.1.18 of the Unidroit Principles, which has an identical wording and also makes clear that an oral modification cannot beinterpreted as an implicit renunciation of the NOM-clause. Article 2:106PECL, on the other hand, states that a NOM-clause is only a rebuttable presumption that an agreement to modify or end the contract is not intendedto be legally binding unless it is in writing. Contrary to Article 29 clse andArticle 2.1.18 of the Unidroit Principles, which establish substantive rulesfavoring party autonomy, the PECL allow a party to prove that the partieshave chosen a form other than to modify or end the contract and thus, provide for more flexibility. 125 The PECL reduce NOM-clauses to proceduralclauses reversing or determining the burden of proof. The comment indicates that the guiding principle for such a procedural conception is goodfaith since it would be contrary to good faith to deny a party the right toprove a modification or termination if the other party agreed to that effectbut later invokes the NOM-clause. The PECL being clearly influenced bythe objective theory, in fact, reduces the impact of the NOM-clause. Thisillustrates again that different perceptions of contract interpretation mayinfluence the scope that is given to interpretation clauses.

When international contracts are not governed by CISe, different perceptions of the applicable national law might result in different treatmentof NOM-clauses. This may also be the case in international arbitrationbecause the Unidroit Principles and the PECL have different approaches

123 On all these aspects, see Farnsworth on Contracts, op. cit., II, 245-251 and F.Rothermel, Role of Course of Performance and Confirmatory Memoranda inDetermining the Scope, Operation and Effect of "No Oral Modification" Clauses, 48lIniv. Pillsburgh Law &v. (1987), pp. 1239ff.

124 See R. Hillman, Article 29(2) of the United Nations Convention on Contracts forthe International Sale of Goods: A New Effort at ClarifYing the Legal Effect of 'No OralModification' Clauses, 21 Cornell Int. I"aw j, 1988, pp. 449-466. For an application of aNOM-clause and Article 29 CISG and Article 2.1.18 Unidroit Principles, see ICC ArbitralAward, Case 9117, 10 Bull. Cow; Int. Arb. ICC, 1999, No.2, p. 96.

125 A. Hartkamp, op. cit., p. 181.


to the effect to be given to NOM-clauses. Contracting parties may beadvised to clarify their position regarding the various issues of this debateand to have it reflected in their NOM-clause in order to give indications tojudges and arbitrators. Under the subjective theory and the literal systemof interpretation, NOM-clauses thus clarified seem to be binding, whereas,under the objective theory, this cannot be guaranteed. Finally, after havingdiscussed the binding effect of NOM-clauses, the question arises whetherthese clauses are enforceable if it is alleged that the parties have varied theagreement orally or in a written form that does not conform with therequirements of the NOM-clause. This situation will be subject to the different notions and requirements of the applicable law regarding waiver andsimilar concepts. Also, the solution will depend upon the presence of anon-waiver clause in the contract. Since waiver and non-waiver clauses arediscussed in the next section of this chapter, the reader is referred to thatsection for further information (see Section III.H).

So far, NOM-clauses have been considered from a substantive point ofview. During the research, no indications have been found for argumentsconsidering that NOM-clauses may be characterized as evidence agreements excluding any evidence establishing that the parties have varied thewritten contract by oral agreement, by course of conduct or in any otherway that does not comply with the requirements of the NOM-clause. If parties were to intend NOM-clauses to have any such effect, this should beexpressly stated in the clause.

H. Non-Waiver Clauses

One of the crucial problems with entire agreement and NOM-clausesis to determine their effects if one party acts in contravention of theseclauses and subsequently invokes these clauses. Under national legal systems, there are correction mechanisms based on principles of impliedrenunciation, venin: contra factum proprium, waiver by agreement or by conduct, estoppel or Rechtsverwirkung. 126 If these corrections are put in place,their effect is to derogate from entire agreement and NOM-clauses.

Contracting parties often want to protect themselves against these surprises from national law and, therefore, provide for a defense line based ona contractual clause rejecting any kind of waiver. These clauses may becalled waiver clauses because their subject matter is related to waiver issues.If one looks at their function to shield against waiver-related arguments,these clauses may be referred to as anti-waiver clauses or non-waiver clauses.

126 See L'interdiction de se contredire au detriment d 'autrui, M. Behar-Touchais, (ed.),Paris, Economica, 2000.


At least two different sets of non-waiver clauses may be distinguished.The first category deals with entire agreement and NOM-clauses and provides that the written contract forms the entire agreement between theparties and can only be modified in writing. Subsequently, these clausestackle the problem whether obligations other than those stemming fromthe written contract may be imposed upon the parties based upon awaiver of the entire agreement and NOM-clauses. One example may becited to draw the picture:

"Entire Agreement, Waiver. This Agreement, including the Scheduleshereto, constitutes the entire agreement between the parties pertaining to the subject matter hereof and there are no representations, warranties or other agreements between the parties inconnection with such subject matter. Except as expressly providedin this Agreement, no amendment, waiver or termination of thisAgreement shall be binding unless executed in writing by eachparty to be bound thereby. No waiver of any provision of thisAgreement shall constitute a waiver of any other provision norshall any waiver of any provision of this Agreement constitute acontinuing waiver unless otherwise expressly provided. No failureor delay on the part of any of the parties to exercise any right,power, or privilege hereunder shall operate as a waiver thereof,nor shall any single or partial exercise of any right, power or privilege under this Agreement preclude any further exercise thereofor the exercise of any other right, power or privilege."

Entire agreement, NOM- and non-waiver clauses do not have to beused in conjunction, as in the previous example. Combinations of onlyNOM- and non-waiver clauses are often found. For instance,

"No modification of the Contract is valid unless agreed or evidenced in writing. However, a party may be precluded by this conduct from asserting this provision to the extent that the other partyhas relied on that conduct."127

All these non-waiver clauses refer to the written contract and areattempts to freeze the contract in the sense that the contract terms need tobe enforced except where the contract has been amended in writing. Forthat reason, a failure to enforce contract terms is not to be deemed a waiverin that particular case nor for future cases:

127 Article 1.5 of the ICC Model International Sale Contract, ICC Publication No.556, Paris, ICC Publishing, 1997. For similar provisions, see Article 26 of the ICC ModelCommercial Agency Contract, ICC Publication No. 644, Paris, ICC Publishing, 2002 andArticle 26 of the ICC Model Distributorship Contract, ICC Publication No. 646, Paris,ICC Publishing, 2002.


"Failure to insist upon strict compliance with any of the terms,covenants, or conditions hereof shall not be deemed a waiver ofsuch terms, covenants, or conditions nor shall any waiver or relinquishment of any right or power hereunder at anyone or moretimes be deemed a waiver or relinquishment of such right orpower at any other time or times."

These non-waiver clauses have gradually become more sophisticated instating the circumstances that may constitute waiver. For instance,

• "Le Chef de File et/ou les Preteurs ne seront pas considerescomme ayant renonce aux droits qu'ils tiennent de la Conventionet/ou des Billets aOrdre du fait qu'ils n'auraient pas exerce lesdits droits, qu'ils les auront exerces partiellement ou avec retardou qu'ils n'auront exerce qu'un seul d'entre eux."

• "Variation/Waiver. Any amendment of this Agreement shall bebinding upon the parties only if mutually agreed in writing and thevariation or waiver of any terms or conditions with respect to anyparticular sale or transaction shall not be construed as a variationor waiver with respect to subsequent sales or transactions."

• "Failure of either party to insist upon the strict and punctual performance of any provision hereof shall not constitute waiver or estoppelin one case and shall not constitute a waiver or estoppel with respectto a later case, whether of similar nature or otherwise."

They also provide for procedures under which waiver may be accepted.In that respect, these clauses, in fact, repeat and rephrase NOM-clauses insaying that a waiver must be recorded in writing, signed by duly authorizedrepresentatives of the parties and/or provide the extent of the waiver. Thefollowing are examples of this kind of clauses:

• "Section 17.5 Waiver. None of the provisions of this Agreementshall be considered waived by a party unless such waiver is in writing and signed by such Party. No waiver shall be construed as amodification of any of the provisions of this Agreement or as awaiver of any default (present or future) hereunder or breachhereof, except as expressly stated in such waiver."

• "Non WaiverSubject to Clause ... below, no relaxation, forbearance, delay orindulgence by either party in enforcing any of the terms and conditions of the Contract or the granting of time by either party tothe other shall prejudice, affect or restrict the rights of that partyunder the Contract, nor shall any waiver by either party of anybreach of the Contract operate as a waiver of any subsequent orcontinuing breach of the Contract. Any waiver of a party's rights,


powers or remedies under the Contract must be in writing, datedand signed by an authorized representative of the party grantingsuch waiver, and must specifY the right and the extent to which it isbeing waived."

The distrust of contract drafters regarding modifications of the writtencontract through waiver may be illustrated by the following two clauses thatseem to exclude modification in writing of the contract by waiver because,in these clauses, waiver is seen as an incidental problem to be solved in anincidental way:

• "Any waiver of, or consent to depart form, the requirements of anyprovisions of this Agreement shall be effective only if is in writingand signed by the Party giving it, and only in the specific instanceand for the specific purpose for which it has been given."

• "This Agreement may not be amended or modified except by aninstrument in writing signed by, or on behalf, the Seller and thePurchaser. Waiver of any term or condition of this Agreement shallonly be effective if in writing and shall not be construed as a waiverof any subsequent breach or waiver of the same term or condition,or a waiver of any other term or condition of this Agreement."

A second set of non-waiver clauses, which may be conceived, but werenot found in the research, does not merely refer to the written contract butgenerally refers to deviation from existing contractual arrangements, practices and course of dealing. These non-waiver clauses, which have a muchbroader scope than the ones of the first category, attempt to protect notonly from derogations from the written contract but more generally fromthe situation existing between the parties as that situation is based on written and oral arrangements or on practices or course of dealing.

The effect of non-waiver clauses is to be tested against the applicablenational law. Under the English model with literal interpretation, they generally will be enforced. The same holds true for jurisdictions such asFrance, which follow the subjective model and where contract terms will bebinding and effective except for an abuse of a contractual right or whereone might argue that the non-waiver clause has been waived by a subsequent oral agreement. The chances that non-waiver clauses will be reviewedby courts may be higher injurisdictions following the objective model wereit to appear that the application of contract terms was waived. A partyinvoking the contract term may, under the law of these jurisdictions, beheld to be estopped from doing so because the other party could legitimately rely on any such conduct. Good faith and fair dealing may thenimpose disregarding the non-waiver clause of the contract and enforcingthe contractual obligations as they have developed in fact between the par-


ties. The non-waiver clause may then operate not so much as a substantiveclause excluding waiver-related arguments but as a procedural clauseincreasing the burden of proof for the party invoking waiver.

For international sales contracts governed by CISe, Article 29(2), firstsentence, CISe provides that the requirement to modify an internationalsales contract is modified in writing by virtue of a NOM-clause is effective.However, the second sentence of Article 29 (2) adds that a party may be precluded by its conduct from asserting the NOM-clause to the extent that theother party has relied on that conduct. 128 In this respect, the Clse codifiesfor international sales law what national laws provide under theories ofestoppel, legitimate reliance, Nemo venin: contra factum pTOprium or Rechtsverwirkung. The question is then how Article 29 (2) relates to the non-waiverclauses discussed in this section. Under article 6 CISe, the Convention contains only dispositive rules, and they can be excluded by the parties eithercompletely or partially. If the parties have not completely opted out ofCISe, one may wonder whether their non-waiver clause amounts to anexclusion of Article 29(2), second sentence CISe. Under a uniform interpretation of CISe under its Article 7 (1), one might rely on the objectiveorigins of CISe (see Section II) to argue that the position under CISe issimilar to those jurisdictions that follow the objective theory. Consequently,judges under Clse might ignore the non-waiver clause if that clause wouldamount to permitting a party to deny conduct that, in itself, did not comply with the non-waiver clause.

By way of conclusion, one can say that non-waiver clauses may be useful, but under some legal systems may not give the protection they seemto provide upon first reading. If the contracting parties under these lawswant to enforce the non-waiver clause in the way it has been written, theyshould at all times comply with the contract terms and not tolerate derogations unless any such derogations are properly managed by recordingthem in writing and setting forth the reasons, time limits and scope ofthese derogations.

I. Severability Clauses

Contract drafters having shielded their written contract by means ofentire agreement, NOM- and non-waiver clauses, also frequently want toprotect their product from invalidity. Clauses of invalidity, by and largebeing determined by mandatory rules of the applicable law, look muchmore to the consequences of invalidity. Many international contracts provide for severability clauses (clauses de nullite partielle, clauses de divisibilite,

12R Article 2.1.18 of the Unidroit Principles and Article 2: 106(2) PEeL contain similar provisions. The analysis set forth below applies to both Principles.


Salvatorische Klauseln) under which the nullity of one or several clauses doesnot necessarily entail the nullity of the complete contract. On the otherhand, no examples were found of clauses imposing the interpretation tobe in favor of the validity of the contract (potius ut valeat) or to convert aninvalid contract into a valid one.

These severability clauses are not clauses purporting to determine themeaning or effects of contracts which are based on the understanding thatthe contract has been concluded and is valid. Rather they deal only withthe consequences of nullity and do not solve the contract's ambiguities,gaps or contradictions. They are discussed here because they reflect theparties' intentions as to how partial invalidity should be solved.

Severability clauses are inserted to protect the parties against the dramatic consequences that may follow if the whole contract falls through,often with retroactive effect. However, one should note that many jurisdictions have already statutory or case law rules129 on partial invalidity thatattempt to solve these problems. 13o In international commercial contracts,where the governing law is the law of any of these jurisdictions, a severability clause is not necessarily required because one can fall back on theapplicable law to solve the problem. However, contract drafters should consider that these national law rules are insufficiently precise and might, forthat reason, supplement these rules with their own contract rules. Forinstance, the German, Swiss and Italian Code provisions permit severability if the parties also would have contracted without the annulled provision(s). Contract drafters may consider any such standard too conjecturaland, therefore, prefer a regulation of their own. Whether they are successful in these attempts will be addressed in the conclusions of this section.

Furthermore, a severability clause may also be inserted in contracts submitted to the law of a jurisdiction that already has a rule on severabilitybecause the severability clause is a boilerplate clause and has not beentaken out of the contract. The boilerplate character of the severabilityclause may, however, be helpful if it is unclear, from the outset, which lawwill govern the contract. A severability clause may then have the advantagethat it is there in the contract, even if, during the negotiations, the applicable law changes in favor of a legal system that does not have a similar rule.

Severability clauses are, of course, most useful in relation to international commercial contracts governed by the law of a jurisdiction without

129 Section 139 German Civil Code, Article 20(2) Swiss Code of Obligations, Article1419 Italian Civil Code, Article 3:41 Dutch Civil Code, UCC Section 1-108.

130 See also Article 3.16 of the Unidroit Principles and Article 4:116 PECL regardingpartial avoidance.


firm statutory or case law rules regarding partial invalidity.I3I In those jurisdictions, severability clauses are clear indications that the parties wanted tosave the complete contract from invalidity (clause dite de validite, favol' validitatis) and that, therefore, a single clause is not an essential element of thecontract or can be severed from the other clauses.

The special status of arbitral clauses and forum selection clauses covering severability also needs mention. Under many laws, these clauses areconsidered severable. Their autonomous character is then based on theargument that the dispute resolution mechanism chosen by the partiesshould also become operational if the very existence of validity of the contract is raised.

Mter discussing the merits and possibilities of severability clauses,one must now turn to their analysis. A simple severability clause mayread as follows:

"If any provision of this contract shall be invalid or without effectin accordance to applicable law, the remaining provisons shall bevalid and enforceable in accordance with their terms."

Sometimes, clauses limit the scope of the invalidity to the persons orcircumstances affected by the invalidity or to the territory of the judgeenforcing an international mandatory rule (e.g., export restrictions, boycott, anti-trust lawI32) of his forum:

• "And such invalidity or unenforceability shall not affect the application of such provisions to persons or circumstances other thanthose to which it is held invalid or unenforceable."

• "Le fait que l'une des stipulations de la Convention soit declareenulle, ou non susceptible d'execution par une juridiction quel-

131 These jurisdictions include France, Belgium and Quebec. Under French law,judges must declare contracts null and void if maintaining the contract would be contrary to public policy. Otherwise, the contract may be saved if the provision to bedeclared null and void was not decisive in concluding the contract. A severability clausemay be an important indication to that effect. Thus, the severance criterion seems to beprimarily subjective (on these issues, see B. Mercadal, Of). cil., 401-402). Under Belgianlaw, nullity of one clause will result in the nullity of the complete contract if the clausecannot be severed from the other clauses of the contract. However, there are differencesof opinions whether severance is to be determined on the basis of the intentions of theparties or in a objective way according to standards of reasonableness (see R. Kruithof,in R. Kruithof, H. Bocken, F. De Ly, & B. De Temmennan, Overzichl van rechlsf)raak(1981-1992), Tijdschrift vom Privaatrecht, 1994, pp. 603-604).

132 With regard to severability and European competition law, see Nos. 66 and 67 ofthe Commission Notice on Guidelines on Vertical Restraints, OJ October 13, 2000, C291, 1-44.


conque, n'affectera en rien la legalite, la validite de ladite stipulation devant une autre juridiction ou la possibilite d' executer lesautres stipulations de la presente Convention."133

Sometimes an exception is provided in relation to essential clauses. Forinstance,

• "10.10. Severability. Any provision hereof prohibited by or unlawful or unenforceable under any applicable law of any jurisdictionshall as to such jurisdiction be ineffective without affecting anyother provision of this Agreement unless such provision is essential to the transactions herunder."

• "25.3. The nullity of a particular clause of this contract shall notentail the nullity of the whole agreement, unless such clause is tobe considered as substantial, i.e. if the clause is of such importancethat the parties (or the party to the benefit of which such clauseis made) would not have entered into the contract ifit had knownthat the clause would not be valid. "134

• "Nullite partielleLa nullite d'une clause au present Contrat n'affectera toutefois pasles autres clauses du present Contrat et n'entrainera donc pas sonannulation sauf si la nullite de cette clause modifiait les intentionsprincipales des parties au jour de la signature du present Contrat."

Any such clauses can, however, also be formulated in a more objectiveway, which does refer not so much to the common intentions of the partieshad they known about the invalidity but rather to whether the clause canbe separated from the other clauses of the contract:

"The parties hereto agree that, in the event of one or more provisions of this Agreement to be subsequently declared invalid orunenforceable by court or administrative decision, such invalidityor unenforceability of any of the provisions shall not in any way

133 For a clause which refers to a part of a clause being held invalid, see the follow-ing example:

"Severability

If any provision of this Contract, or any provision hereof, applicable to any particular situation or circumstances is held invalid, the remainder of this Contractor the remainder of such provision (as the case may be), and the applicationthereof to other situations or circumstances shall not be affected thereby. Theparties shall then negotiate and agree upon a valid provision coming closest totheir intentions."

134 Article 26 of the ICC Model Commercial Agency Contract, ICC Publication No.644, Paris, ICC Publishing, 2002.


affect the validity or enforceability of any other provisions hereofexcept those which the invalidated or unenforceable provisionscomprise an integral part of or are clearly inseparable from suchother provisions."

Some clauses require that conditions are met before the severabilityclause may be called upon, such as the condition that the invalidity isdeclared by a court havingjurisdiction over the case, or that a competentauthority has indicated that the clause is invalid:

• "If any provision of this agreement is declared by a court of competentjurisdiction to be invalid, illegal or unenforceable, such provision shall be severed from this Agreement and the otherprovisions shall remain in full force and effect...."

• "SeveranceIn any provision of this Agreement or these Conditions is declaredby any judicial or other competent authority to be void, voidable,illegal or otherwise unforceable or indications to that effect arereceived by either of the parties from any competent authority theparties shall amend that provision in such reasonable manner asachieves the intention of the parties without illegality or at the discretion of the Principal it may be severed from this Agreement andthe remaining provisions of this Agreement shall remain in fullforce and effect ..."

The clauses above do not address the consequences of partial invalidity but only state that the contract is saved except for the annulled clauses.However, many clauses contain provisions regarding the problem of fillingthe gap created by the disappearance of the annulled clause. Twoapproaches can in this respect, be followed. A first approach is to have thecontract continue without the annulled clause:

• "Severability. The invalidity or unenforceability of any particularprovision of this Agreement shall not affect the other provisionsand shall not relieve either party from its obligations hereof, andsuch other provisions shall be construed in all respects as if suchinvalid or unenforceable provision were omitted."

• "In the event that any provision (or portion of a provision) of thisAgreement is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, the remainder ofthis Agreement (and of such provision) shall not be affectedexcept to the extent necessary to delete such illegal, invalid orunenforceable provision (or portion thereof), unless the deletionof such provision or portion thereof shall substantially impair thebenefits of the remaining portions of this Agreement."


The second approach is to replace the invalid provision with a validone. 135 One clause provided that any such replacement has retrospectiveeffect. 13G Two main sets of clauses can be distinguished. First, there areclauses referring to the hypothetical intentions of the parties as, for example, in the following ones:

• "26.3. If any provision or clause of this contract is found to be nullor unenforcable, the contract will be construed as a whole to effectas closely as practicable the original intent of the parties; however,if for good cause, either party would not have entered into thecontract knowing the interpretation of the contract resulting fromthe foregoing, the contract itself shall be null."137

• "Should any provision of this agreement be entirely or partiallyinvalid, the validity of the other provisions shall be unaffected. Inplace of an invalid provison, a valid provision shall be presumed tobe agreed upon by the parties which comes closest to the one actually agreed upon."

Second, some clauses refer to more objective standards such as thespirit of the contract or the economic function of the contract:

• "Toute stipulations de la Convention qui s'avererait nulle, illegaleou non susceptible d'execution, en tout ou en partie, sera danstoute la mesure du possible remplacee par la disposition la plussimilaire possible en accord avec l'esprit de la Convention."

• "Nullite partielleDans Ie cas ou certaines dispositions du present Contrat seraientinapplicables pour quelque raison que ce soit, les Parties resterontliees par les autres dispositions du present Contrat et s'efforceront

135 These approaches are not mutually exclusive, see for instance the followingclause:

"In the event that anyone or more of the provisions of this Agreementshall for any reason be held to be invalid, illegal or unenforcable in anyrespect, such provision shall be deleted and the remaining provisions ofthis Agreement shall continue in full force and effect (to the extent thatis not rendered meaningless) and, if necessary, shall be so amended as necessary to give effect to what the Parties have intended or reasonably wouldhave intended when drawing up this Agreement."

136 "Insofar as a replacement for any such provision is necessary in order to achievethe objective of the Agreement, the Parties shall meet as soon as possible and agreeupon new provisions in the spirit of the Agreement and to the same economic effect asmuch as possible. Such new provisions shall be made legally valid and applied retroactivelyas of the date when the replaced provision had become invalid or unenforceable."

137 Article 26 of the ICC Model Distributorship Contract, ICC Publication No. 646,Paris, ICC Publishing, 2002.


de remedier aux clauses inapplicables dans Ie meme esprit quecelui qui a preside al'elaboration du present Contrat."

• "SeverabilityIf any of the terms and conditions of this Contract shall be orbecome unenforceable for any cause whatsoever, the ensuring lackof enforceability shall not affect the other provisions hereof, andin such event the parties hereto shall endeavour to substitute forthwith such other enforceable provision as will most closely correspond to the legal and economic contents of the said terms andconditions. "

• "Si une ou plusieurs stipulations du present contrat devai(en)ts'averer non valable(s) ou nulle(s)(1) les deux parties reconnaissent que toutes les autres dispositionsdu present contrat, pour autant qu'elles demeurent d'application,restent valables; et(2) toute stipulation non valable ou nulle sera modifiee, apres concertation, par une clause semblable qui respectera Ie mieux possiblel'objectif economique de la stipulation premiere."

• "The Members undertake to replace any such stipulation not validby another one, which is suitable for the intended purpose underthis agreement and which is most similar from an economic pointof view."

In one clause, subjective and objective standards were combined:

"Should a single provision or clauses of this Supply Contract proveto be invalid or unenforceable or not having force, the other partsof this Supply Contract shall remain in force and the Parties willuse their best efforts to prepare a new provision or clause corresponding to the common intentions and objectives of this SupplyContract taking into consideration the overall spirit of the FrameSupply Contract."

Some clauses provide for a way out if the nullity of a contract clausecannot be solved by means of replacing the nullified provision with a similar one in accordance with objective standards. The most obvious solutionis to refer the issue to the parties for an amicable settlement or to the dispute settlement mechanism provided for in the contract:

• "Invalidity of ProvisionsEach of the provisions contained in this Agreement is distinct andseverable and a decision pronouncing the invalidity or unenfoceability of any such provision or part thereof by a court, agency orother body of competentjurisdiction shall not affect the validity orenforceability of any other provision hereof. Notwithstanding the


foregoing, the parties shall negotiate in good faith in order toagree the terms of a mutually satisfactory provision to be substituted for a provision found to be invalid or unenforceable."

• "If any provision of this Agreement which the parties agree is immaterial shall become null and void, this shall not affect the validity ofthe remaining provisions. If, within ninety days after a provision ofthis Agreement has been determined to be or to have become nulland void, and the parties have neither agreed that such provision isimmaterial nor agreed to a suitable mutually acceptable modification of this Agreement that will not be null and void, this Agreementmay be referred to arbitration under Section 23."

• "If any term or provision of this Agreement shall be held to be illegal, invalid or unenforceable by a court of competent jurisdictionor the Board of Arbitrators pursuant to Section 18 above, the parties agree that the court or the Board of Arbitrators making thedetermination of invalidity or unenforceability shall modifY thisAgreement to reduce the scope, duration or area of the term or provision, to delete specific words or phrases, or to replace any invalidor unenforceable term or provision with a term or provision that isvalid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and thisAgreement shall be enforceable as so modified."

• "Severability. If any terms or conditions of this Agreement shouldbe adjudicated to be invalid or unenforceable, the remaing termsand conditions of this Agreement shall remain in full force andeffect without regard to the invalid or unenforceable terms or conditions; however, a court of competent jurisdiction shall have thepower to reform such invalid or unenforceable terms or conditionsto the minimum extent necessary to render the same valid andenforceable in accordance with the original tenor thereof."

Another solution is to give parties an opportunity to terminate the contract under those circumstances:

"SeverabilityIf the event that any provision or several provisions of this Contractshall be or become invalid, then the Parties hereto shall substitutesuch invalid provisions by valid ones, which in their economiceffect come so close to the invalid provisions that it can be reasonably assumed that the Parties would have contracted also withthese new provisions. In case such provisions cannot be found, theinvalidity of one or several provisions shall not affect the validity ofthis Contract as a whole, unless the invalid provisions are of suchessential importance for this Contract that it is to be reasonablyassumed that the Parties would not have contracted this Contract


without the invalid provisions. In such a case the Party affectedmay terminate this Contract by written notice to the other Partywith immediate effect without prejudice to the affected party'srights in law or in equity."

These termination option clauses may be symmetric or asymmetric. Foran example of the latter, see the following clause:

"SeveranceIn any provision of this Agreement or these Conditions is declaredby any judicial or other competent authority to be void, voidable,illegal or otherwise unforceable or indications to that effect arereceived by either of the parties from any competent authority theparties shall amend that provision in such reasonable manner asachieves the intention of the parties without illegality or at the discretion of the Principal it may be severed from this Agreement andthe remaining provisions of this Agreement shall remain in full forceand effect unless the Principal acting reasonably decides that theeffect of such declaration is to defeat the original intention of theparties in which event the Principal shall be entitled to terminatethis Agreement by 30 days' notice to the Agent and the provisionsclause.... (Termination Consequences) shall apply accordingly."

Having analyzed contract practice regarding severability clauses, oneshould address their legal relevance. First, these clauses do not definewhich contractual provisions are essential or non-severable. The absence ofany such listing makes it difficult to apply these clauses because the partiesin tempore non suspecto did not identify the clauses that they consider essential or material in the absence of which they would not have contracted.Rather, the parties give general and vague guidelines as to when to save thecontract. In the end, a judge or arbitrator will have to apply these guidelines; severability clauses in this respect do not provide the legal certaintythat the parties envisaged when drafting the clause. The contracting parties seem to postpone a solution that is to be reached at a later time inmutual agreement or through court intervention. This pragmatic approachhas the advantage of flexibility, which is wise since the reasons and scope ofinvalidity may be related to various reasons which are unforseeable at thetime of contracting. New legislation or regulation or developments in caselaw may be examples of any such events. Second, these clauses remainhighly valuable because they operate as signals that the parties want severability (symbolic regulation).

The better approach may then be to determine the procedure to befollowed by the parties if part of the contract is affected by nullity. Theseprocedural requirements are to be observed by the parties and aim at find-


ing ways out of the new situation created by partial nullification. At thatstage, the parties are still in control of the process and the procedural elements of these clauses may form a barrier against immediately institutingcourt or arbitration proceedings. The mechanism is, in many ways, similarto the one often used in hardship situations.

Finally, the question remains whether there is party autonomy regarding the consequences of termination as a result of invalidity and, thus,whether these severability clauses are binding upon judges. The answer isprobably negative but, in applying statutory and case law rules,judges canindirectly apply the severability clause thereby endorsing the view of theparties that the contract can be severed.

J. Gap Filling Clauses

Contracting parties often include some of the clauses discussed abovein their contracts, particularly contract definition clauses (see SectionIILB) , entire agreement clauses (see Section IILC), headings (see SectionIILD), definitions (see Section IILE) , language clauses (see Section IILF) ,NOM-clauses (see Section IILG), non-waiver clauses (see Section III.H)and severability clauses (see Section IILI). We now proceed to a number ofclauses (gap filling clauses, contract supplementation with custom, usagesor course of dealing and good faith and fair dealing clauses), which arefound rather infrequently in international commercial contracts. The reason that these clauses are less frequent in contracts is probably becausethese issues are already dealt with in the applicable national law and theserules cannot be easily formulated in contract term language.

Gap filling is barely addressed in international contracts. Only fourclauses were found that extend the severability clause to gap filling underwhich the solution for partial invalidity is also applied to gap filling:

• "Should any provision of this Agreement be or become invalid orshould this Agreement be found to contain a gap, the validity ofthe remaining provisions shall not be affected thereby. The invalidprovision or the gap shall automatically be replaced or filled bysuch other provision coming, if and to the extent legally permitted, as close as possible to what the parties hereto have intendedwith the valid provision, in particular with respect to any invalidprovision, time or period contained herein, or to what they havestipulated if they had considered the issues to be regulated."

• "In case any essential rulings of this Agreement should be orbecome null and void, or any such rulings contain necessary lackings, the Agreement shall nevertheless remain in force, and Partiesin any such circumstances shall immediately come together and by


mutual consent negotiate bona fide an accomodation in orderto replace the failing rule or complete the lacking one by suchvalid one which comes nearest to the economic purposes of thefailing ones."

• "Clause above (the severability clause) shall apply accordingly ifthis Agreement is incomplete."

• "Diese Vorschriften gelten entsprechend wenn bei der Auslegungoder Durchfuhrung des Vertrags eine erganzungsbedurftige Luckeoffenbar wird."

Apart from these four clauses, no other gap filling clauses were encountered during the research except for the following clause:

"Eine solche Vertragslucke ware von den Parteien gemass Sinn undZweck dieses Vertrages mit einer Erganzungsvereinbarung zufullen."

One may be referred to Article 1.2 of the ICC Model International SaleContract138 which-based on Article 7 (2) CISG-states that questions relating to the contract, which are not expressly or implicitly settled by it, shallbe governed by the CISe, and to the extent that such questions are not covered by clse by reference to the law of the country where the seller has hisplace of business. However, this clause is much more a gap filler at the conflict of laws level than at the substantive level.

The gap filling clauses quoted above, generally will be enforced inmost jurisdictions but, in states following the objective theory, they may bepreempted by notions of good faith and fair dealing. In those countries,they may provide non-binding contract interpretation guidelines to judgesand arbitrators.

Finally, it should be emphasized again that in common law jurisdictions, entire agreement clauses are not intended to address the problem ofgap filling. Therefore, they do not impose literal interpretation underwhich there are serious restrictions as to the acceptance of implied termsnor intro-interpn;tation (i.e., interpretation on the basis of the text and context of the written instrument alone). Thus, gap filling in these jurisdictionsis left to statutory or case law principles of interpretation under which theclauses cited above may be relevant. In civil law jurisdictions, one shouldavoid the trap of giving interpretative weight to entire agreement clausesas to gap filling. Therefore, entire agreement clauses as potential gap fillersare to be interpreted with great caution and-depending on their precisewording-are to be interpreted restrictively in the sense that in case of

13R ICC Publication No. 556, Paris, ICC Publishing, 1997.


doubt, they should be held not to address the issue of gap filling. For contract drafters, the recommendation is to clarify in entire agreement clausesthat they address only the problem of contradicting or additional termsthat have not been recorded in the agreement in writing, but are notintended to deal with gaps. In this latter respect, contract drafters mightconsider some specific clauses, as the ones cited above, to address gap filling or to leave it up to the law applicable to the contract.

K. Custom, Usage and Course of Dealing

The contracts, which formed the object of the research, also containedscant provisions referring to customs, usages and course of dealing. Thismay be because most of the contracts were tailor-made contracts, and thatthe standard contracts of the commodities sector were not analyzed.

In the limited number of clauses referring to custom, usage or course ofdealing, two basic types can be identified. In one, references are sometimesmade to practices of a certain branch of trade or to internationally widelyknown and used standard terms such as the Incoterms. For example,

• "To the extent applicable, the obligations of the parties are to beconstrued in accordance with practices of the international commercial bullion dealer market."

• "For the interpretations of commercial terms, reference shall bemade to the 'International Rules for the Interpretation of TradeTerms' fixed by Incoterms 1953 of the International Chamber ofCommerce, as well as by the additions and revisions applicable atthe time of the conclusion of the agreement."

• "IncotermsUnless inconsistent with any provision of the Contract, the meaning of any shipping term and the rights and obligations of the parties thereunder shall be ascribed by "Incoterms." "Incoterms"means the international rules for the interpretation of trade termspublished by the International Chamber of Commerce (2000edition) ."

• "Words which have a well known technical or trade meaning areused in this Agreement in accordance therewith."

On the other hand, one also notes a hostile attitude towards custom,usage, practices or course of dealing not so identified, because these maythreaten the completeness of the written contract and jeopardize the objectives to be achieved by entire agreement, NOM- and non-waiver clauses.These clauses, for that reason, sometimes try to exclude custom, usage,practices and course of dealing. For instance,


• "Entire Agreement. It is agreed that this Agreement sets forth theentire understanding and agreement between the parties. Nounderstanding, agreement or trade custom not expressly stated inthis Agreement shall be binding on the parties in the interpretation or fulfillment of this Agreement unless such understanding,agreement or trade custom is reduced to writing and signed by theparties."

• "Either party's waiver of any breach or failure to enforce any ofterms, covenants, conditions or other provisions of this Agreement,at any time, shall not in any way affect, limit, modifY or waive thatparty's right thereafter to enforce or compel strict compliance withevery term, covenant, condition or other provision hereof, anycourse of dealing or custom of the trade notwithstanding."

• "( ... ) and this Contract shall not be modified, varied or supplemented by any course of dealing, usage of the trade or otherwiseexcept by a writing signed by the parties hereto."

The clauses mentioned above may be effective in most jurisdictionsalthough, in countries following the objective theory of contract interpretation, they might be applied only indirectly and eventually be preemptedby principles of good faith and fair dealing.

L. Good Faith and Fair Dealing Clauses

A third example of the contract drafters' inclination not to repeatstatutory principles of contract interpretation may be found where goodfaith and fair dealing are concerned. Contract practice shows scant examples of parties referring to good faith and fair dealing as objective standardsfor contract interpretation. The clauses, which were found in long-termbusiness contracts (such as requirement or cooperation agreements,jointventures contracts or R&D agreements), emphasize the intuitu personaecharacter of these contracts and the need for mutual cooperation and consideration for the interests of the other party:

• "Good Faith, Fair Dealing. The Parties hereto confirm that the spiritof mutual cooperation and goodwill underlie this Agreement, andthat the parties shall perform the transactions contemplated hereunder bases on priciples of mutual cooperation."

• "Fairness and Good FaithThe Parties declare it to be their intention that this Agreementand the Project shall operate between them with fairness and without detriment to the interest of either of them and that if in thecourse of this Agreement unfairness to either of them is anticipated or disclosed then the Parties will use all reasonable endeav-


ours to agree upon and thereafter to take such action as may benecessary to remove the cause or causes thereof."

• "Fairness and Good FaithIn entering into this Agreement the Parties recognise that it isimpracticable to make provision for every contingency which mayarise during the course of this Agreement. The Parties declare it tobe their intention that this Agreement and the Project shall operate between them with fairness and without detriment to the interest of either of them and that if in the course of this Agreementunfairness to either of them is anticipated or disclosed then theParties will use all reasonable endeavours to agree upon and thereafter to take such action as may be necessary to remove the causeor causes thereof."

• "In entering into this Agreement parties recognise that it is practically impossible to make provisions for every contingency whichmay arise during the validity of this Agreement. Accordingly, parties hereby state and acknowledge their mutual intent that thisAgreement shall be enforced and implemented between themwith fairness and without detriment to eiter party's interest."

Other clauses focus more on the spirit of the contract and the need forthe parties to act in accordance with that spirit:

• "Each of the parties hereto undertakes with each of the others todo all things reasonably within his power which are necessary ordesirable to give effect to the spirit and intent of this Agreementand the Articles."

• "The Partners shall carry out the terms and provisions of this JointVenture Agreement in accordance with the principle of mutualgoodwill and good faith and respect the spirit as well as the letterof the said terms and provisions."

Finally, there are some clauses that impose a general duty of good faithand fair dealing regarding the performance of the obligations. Theseclauses have been found in an agency contract where the text of the ICCModel Agency Contractl39 had literally been copied:

139 Article 2 of the ICC Model Commercial Agency Contract, ICC Publication No.644, Paris, ICC Publishing, 2002.

Similarly, article 2 of the ICC Model Distributorship Contract (ICC Publication No.646, Paris, ICC Publishing, 2002) provides that:

"Article 2 Good faith and fair dealing

2.1. In carrying out their obligations under this contract, the parties will actin accordance with good faith and fair dealing.


"Good faith and fair dealingIn carrying out their obligations under this agreement, the partieswill act in accordance with good faith and fair dealing.The provisions of this agreement, as well as any statements madeby the parties in connection with this agency relationship, shall beinterpreted in good faith."

The above-mentioned clauses will not create major problems if theapplicable law is the law of ajurisdiction endorsing the objective theory.For English-style jurisdictions and jurisdictions following the subjective theory, there may be the practical problem that one is not familiar with theseopen notions and that, in fact, they do not operate as hard and fast rulesbut as a delegation by the legislator and an invitation to adjudicate on thebasis of objective standards. Judges or arbitrators, less familiar with thisapproach, might find it difficult to work with these contractual good faithand fair dealing clauses.

IV. CONCLUSIONS

From the analysis under Section III above, it appears that contractingparties often insert boilerplate interpretation clauses at the very end orbeginning of contracts. Six out of the 12 classes of interpretation clausesidentified in this report (i.e., entire agreement clauses, clauses regardingheadings or language, NOM-clauses, severability and non-waiver clauses)are used in international commercial contracts drafted by Anglo-Americanlawyers but have also become frequent practice in contracts drafted bylawyers from civil law countries.

It is striking that contracts rarely refer to interpretation guidelinesfound in national legal systems or international conventions. Such interpretation canons (e.g., the contra proferentem rule,110 the favor validitatis rule, 111

2.2. The provisions of this contract, as well as any statements made by theparties in connection with this distributorship relationship, shall be interpreted in good faith."

140 E.g., Article 4.6 Unidroit Principles, Article 5:103 PECL. Only one clause has beenfound where a similar rule was incorporated in a contract:

"19.03 Interpretation. Should the provisions of this Agreement requirejudicial or arbitral interpretation, it is agreed that the judical or arbitralbody interpreting or construing the same shall not apply the assumptionthat the terms hereof shall be more strictly construed against one party byreason of the rule of construction that an instrument is to be construedmore strictly against the party which itself or through its agents preparedthe same, it being agreed that the agents of both parties have participatedin the preparation herein equally."

141 E.g., Article 1157 French and Belgian Civil Codes, Article 4.5 Unidroit Principles,Article 5:106 PECL.


contextual interpretation,142 extensive interpretation143 or objective standards l11 ) are rarely inserted in contracts. This is quite understandablebecause contract drafters have other concerns than legislators. They maynot see any interest in inserting already existing interpretation canons intotheir contracts. It is surprising that in all the contracts reviewed in thecourse of this project, not one single contract has a provision requiring astrict or literal interpretation of the contract. As has been noted in SectionII, this interpretation technique is still prevailing in English contract lawbut contract drafters of contracts submitted to English law apparently donot find it necessary to repeat this literal approach in a contractual provision. l15 Furthermore, the English approach also does not seem to appealto contract drafters of contracts governed by a law other than English law.Contract drafters will not consider inserting any such canon that is contraryto the interests they defend. A contract drafter will, for instance, not likethe contra prvferentem nIle to be inserted in the contract he has been drafting.

In other situations, contract drafters may perceive a clear need andinterest to address interpretation problems with proper contract language.This is true for contract definition clauses, ranking clauses, headings, concept definition clauses, language clauses, entire agreement clauses, NOMclauses, non-waiver clauses and severability clauses. There is a cleartendency towards documentalization (Dokumentenzwang). Contract drafterswant everything to be in writing in one document (including Annexes).Consequently, they want to exclude all prior arrangements, and future

142 E.g., Article 1161 French and Belgian Civil Codes, Article 4.4 Unidroit Principles,Article 5:105 PECL. For two examples in contract practice, see clause 5.4 of the FIDICRed Book (Lausanne, 4th ed., 1989) which provides that the Contract documents shallbe taken as mutually explanatory as well as the following clause:

"3.4 Intention Contract as a whole

The misplacement, addition or omission of a word or character shall notchange the intent of any part of the Contract from that set forth by theContract as a whole. Contractor shall be solely responsible for requestingany interpretation or clarification in such respect and shall bear any costsand expenses arising from his failure to do so."

113 E.g., Article 1164 French and Belgian Civil Codes.

144 See Articles 4.1-4.3, 4-8, 5.1-5.5 Unidroit Principles, Articles 5:102 and 6:101PECL.

115 In one book (A.GJ. Berg, op. cit., p. 80), the suggestion has been made to excludethe English approach in contracts governed by English law by inserting the followingclause:

"To the fullest extent permitted by law, this Agreement shall be interpretedin a reasonable and commercial manner rather than in strict accordancewith the literal meaning of the language used; and, in particular, dueweight shall be given to the underlying business purposes of thisAgreement and of the provision in issue."


arrangements must be recorded in writing, preferably as a rider to the contract. Documentalization is inspired by contract management reasons aswell as by reasons of evidence.

The tendency to documentalization is an element of a broader trendto self-regulation under which the parties replace the uncertainties thatmay exist under applicable national laws with their own contractual rulesthat are perceived to provide for more certainty. This is clear from theanalysis of entire agreement clauses where these clauses in common lawjurisdictions attempt to avoid the uncertainties of the parol evidence rule.This also applies to (l) entire agreement clauses reducing the impact ofnational laws regarding mistake and misrepresentation (see SectionIILG4), (2) NOM-clauses where a written requirement regarding variationis introduced, (3) non-waiver clauses attempting to escape from waiverrules under the applicable law and (4) severability clauses that provide forself-regulatory substantive and procedural requirements regarding the consequences of partial invalidity of the contract.

As has become tradition, reports prepared by the Working Group endwith some advice and suggestions to contract draftsmen. Naturally, it is recommended to be precise and accurate and to avoid ambiguity and repetition. Also, a well-drafted interpretation clause (at least as much as any otherclause) is defective without an adequate choice of law clause and consideration of procedures to resolve disputes. As to interpretation clauses, oneparticularly notes clashes between various legal cultures, not only betweenthe civil law and the common law but also within these legal families. Thus,contract drafters should be strongly discouraged from moving clauses fromone legal family to another, and there is a great need to reconsider thedrafting of many interpretation clauses in view of the differences noted.

Because of the wide variety of interpretation clauses discussed in thislengthy chapter, a brief summary of the interim conclusions of every section commenting on trends to documentalization of international contractpractice is given here:

1. Characterization clauses serve positive functions in that they mayidentifY the nature of the contract and the rules appplicable to thetype of contract involved. To the extent that they have negativefunctions (i.e., attempt to exclude legal rules from being applied),they should be treated with great caution not only as to the mandatory rules they intend to evade or avoid but also regarding dispositive rules since judges and arbitrators may recharacterize thecontractual characterization;

2. Clauses defining the contractual documents and their ranking areuseful since they provide clarity. Parties may consider whether they


intend ranking clauses to operate in a strict manner or whether amore flexible drafting of the ranking clause would be preferable;

3. Once the contract documents have been defined, contractdrafters, through entire agreement clauses, often intend to freezethe contract and exclude other documents. In this respect, entireagreement clauses serve exclusionary objectives. First, partiesshould clearly identify the different objectives they may have inmind when including these clauses: excluding side letters, previous contracts, pre-contractual documents, representations outsidethe written contract, general conditions and/or future contracts ordocuments. Each of these objectives deserve specific attention anddrafting; no simple boilerplate clause or solution will do. Oneobjective, however, warrants mention: when entire agreementclauses attempt to exclude pre-contractual documents, one shouldbe aware of the different meanings and approaches these clausesmay have in different jurisdictions, particularly in contractsbetween parties from civil and common law jurisdictions. Specifically under those circumstances, the entire agreement clause isto be scrutinized against the background of the law applicable tothe contract. In common lawjurisdictions, this type of clauses purports to protect against the uncertainties of the paTOl evidence Tuleunder which no evidence may be admitted to show that the partiesagreed on terms other than the written ones of the contract thatcontradict these terms or add terms to the contract. However, neither this rule nor entire agreement clauses prevent filling gaps,showing that the contract has been modified subsequent to its conclusion nor interpreting ambiguities. In civil law jurisdictions, theuse of entire agreement clauses of this type creates the risk thatthese clauses may be interpreted to exclude extrinsic evidence tofill gaps, to solve ambiguities or to rule on contract variation. If sointerpreted, these clauses seem to be at odds with substantive contract interpretation traditions. If these consequences are intended,one may consider re-drafting entire agreement clauses as evidenceclauses excluding any such evidence concerning these objectives.If it is intended only to exclude agreed terms contradicting or supplementing the agreement in writing, these clauses are also inneed of re-consideration and re-drafting to better reflect that theyonly exclude these additional or contradicting terms. Re-draftingmay strengthen the binding nature of entire agreement clausesunder substantive contract law. Subject to the law applicable to thecontract, they might also be re-characterized as waiver clausesregarding any such additional or contradicting terms;

4. Heading clauses are useful tools for contract management; theymake the contract user-friendly and help to prepare an index anda table of contents. The frankly hostile attitude of contract practice


to exclude any interpretative value of headings seems to be toounqualified, and it may be recommended to look for appropriatedrafting to reflect that headings are drafted primarily for referencepurposes and that headings should not have decisive weight incontract interpretation;

5. Definition clauses intend to avoid repetitions in key concepts andcontribute to greater contract consistency. They should not contain rights and obligations of parties. Attention to detail should notdivert from essential contract elements in need of definition.Contract drafters should reflect upon the issue whether they wantstrict definitions or whether some flexibility is in order. In this latter respect, a clause such as "Unless the context otherwise TequiTes, ..."

might be a good choice;6. Language clauses in international contracts clarify the controlling

language(s) for contract interpretation. The bargaining positionsof the parties are, to a large extent, reflected in the clauses thatwere the subject of the analysis. However, the language clauses maybe too unqualified. Contract drafters should consider languageclauses stating that the different language versions of the contractare mutually explanatory and that one version controls only ifafter interpretation-the conflict persists;

7. No oral modification clauses (NOM-clauses) attempt to shieldagainst contract variation. Under these clauses, contracts maychange only if the requirements of the clause are met. Theserequirements generally include a written form but may also provide for further conditions. These clauses are tested if it is allegedthat the contract has been modified but not in accordance withthe requirements of the clause. Under waiver provisions of theapplicable law, these clauses may become ineffective. To strengthenthe objectives pursued by a NOM-clause, parties generally combinesuch a clause with a non-waiver clause. One may also consideradding an evidence clause under which a party, invoking waiver byagreement or conduct, has the burden of proof;

8. Non-waiver clauses have objectives similar to NOM-clauses in avoiding that the written contract stipulations are to become obsoleteby an oral or other agreement of the parties. They may also havebroader ramifications as they may attempt to protect the agreement in writing from being modified by subsequent conduct. Assuch, they provide a contractual regulation intended to replacelegal rules regarding waiver. Whether and to what extent this contractual regulation is effective will depend upon the applicable law.In this respect, these clauses may not be as effective as their wording would suggest;

9. Severability clauses are not, strictly speaking, interpretation clausesbut have been encompassed in this report because they reflect the


parties' intentions as to the effects to be given to a partial nullification of the contract. They provide for clarification in jurisdictions where there are no statutory rules on partial invalidity as wellas in countries where the statutory standards for dealing with partial invalidity are too open-ended. Severability clauses deal withquestions such as whether and how an invalid provision is to bereplaced, whether subjective and/or objective standards are to beused in relation to such a replacement process and which procedure is to be followed in this process. One notes a pragmaticapproach to the standards to be used. Also, procedural guidelines for the replacement process are very important since theyimpose upon the parties a duty to negotiate to keep the contractin place with a new contractual provision to replace the invalidcontract clause.

In themselves, interpretation clauses vary so much according to thecontractual context that we refrain from making other specific recommendations of general application.

CHAPTER 4

BEST EFFORTS, REASONABLE CARE,DUE DILIGENCE AND GENERAL

TRADE STANDARDS ININTERNATIONAL CONTRACTS

I. INTRODUCTION

When one party to a contract undertakes to perform a given act, thewording of its undertaking is often couched in a variety of terms intended todefine the way in which the duty is to be carried out. A distributor, for example, will agree to use "his best efforts" to develop sales of a product; a bankwill take "reasonable care" to check the authenticity of a document; a contractor will carry out work "diligently" and "according to industry standards."

What is the significance of such expressions? Do they merely help toexplain the normal content of the obligation, or do they alter its intensity?If so, do they place the person who shoulders the duty in a weaker, or astronger, position?

These are probing questions, given the great frequency with whichexpressions of this type appear in all kinds of international contracts. Theterrain is fraught with difficulties. On the one hand, a great variety ofexpressions is used in drafting contracts and, in many cases, seemingly without any great discrimination. On the other hand, many of these expressions may have specific interpretations depending on the law governing thecontract, interpretations of which the parties may not necessarily be aware.

The issue is part of the complex problems arising from concepts "ofvariable scope" found in great numbers in every legal system, I such as"good faith," "equity," "public order," "bonnes mceurs" (morals), "publicinterest," or the concepts of "normal," "manifest," "legitimate," "serious,""gross," "abusive" and many others.

Research, however, must be limited to its terms of reference, and forthe purposes of this chapter the Working Group concentrated on four

1 Cf. Centre National de Logique, l"es notions acontenu variable en droit, Cl. Perelman& R. Vander Elst (eds.), Brussels, 1984.

187


major criteria: "best efforts," "reasonable efforts" (in French, "meilleursifforts" and" ifJorts raisonnables) ," "due diligence" and references to "generaltrade (or industry) standards" (in French, "r-egles de l'art') in all their varying formulations. The Working Group further limited its study to the waysin which these terms define how an obligation must be performed, itsnature and intensity. The word "reasonable," in particular, is obviously usedin many other contexts (e.g., "reasonable" time, "reasonable" indemnity,etc.); these are not considered here, except insofar as they are incidentalto the issues at hand.

Some typical examples encountered by the Group will give the readeran insight into the practice of contractual drafting (Section II). The secondpart of the chapter will analyze that practice and synthesize the main conclusions (Section III); the chapter ends with the usual advice to negotiators(Section IV). The basis is around 150 sample clauses, gleaned from a variety of international contracts.2

II. CONTRACTUAL PRACTICE

"Best efforts," "reasonable care" and "due diligence" clauses, as well asreferences to accepted industry standards, tend to appear mainly in certaintypes of contracts or clauses.

A. Illustrations

1. Types of Contract

a. Distribution Agreements and Sales Promotion

In a distribution agreement, the distributor often undertakes to promote sales of the products concerned. This type of undertaking is one ofthe main areas in which the parties may decide to refer to the "best efforts"or "reasonable efforts" criterion.

• "The distributor agrees to use its best efforts to sell, promote, market and support the Products and to develop and maintain the reputation and goodwill of ... and the Products in the Territory withDistributors' customers."

• "During the period of the Permission, the licensee shall use its reasonable endeavours to sell and to increase the sale of the LicensedProducts in Benelux ..."

2 On these clauses, also see C. Chappuis, Les clauses de best efforts, reasonable care,due diligeru;e et les regles de l'art dans les contrats internationaux, Rev. Dr. AI! Int., 2001,pp. 281-301; D. Philippe, Les clauses de Best Efforts, in Liber (Jirnir;orurn Guy IIoTsrnans,Brussels, 2004, pp. 905-942.

Best Efforts, Reasonable Care, Etc. • 189

In each case, it is clear that a duty has been undertaken, but no explanation is given of its scope, which causes difficulties in interpretation. Whatis the scope of "best efforts" and "reasonable endeavours" in this context?Is there a difference between the two terms?

What then should one make of the following formula where differentcriteria are brought together:

"The Licensee shall endeavour in every reasonable and proper wayand to the best of his ability to further the sales of the said [machine]containing such patented improvement."

The model agency contract prepared by the International Chamber ofCommerce also bundles criteria:

"The Agent agrees to use his best endeavours to promote the sale ofthe Products in the Territory in accordance with the Principal'sreasonable instructions and shall protect the Principal's interestswith the diligence of a responsible businessman."?'

The same model contract resorts to another formula to qualify theagent's obligation to inform his principal:

"The Agent shall exercise due diligence to keep the Principalinformed about his activities, market conditions and the state ofcompetition within the Territory.... "4

The scope of the duty to promote sales of the products is sometimesmore specific:

• "SECUNDO shall use its best efforts to promote the sales of CONTRACT PRODUCTS, in particular by providing technical assistance for custolners."

• "Le licencie s' engage a fair-e ses meilleur'S efforts pour assurer Iedeveloppement de son affaire de location de vehicules, sur IeTerritoire, sous la marque de commerce ... , de maniere ace queIe chiffre d'affaires de son affaire de location de vehicules sous lamarque de commerce ... se developpe aun taux au moins egal acelui du marche de location de vehicules dans son ensemble, surIe Territoire."

• "L'agent s'engage afaire ses meilleurs efforts pour promouvoir de lafar;on la plus active la vente des Produits dans Ie Territoire.

3 LC.C., Model Agency Contract, 1991, Art. 3.1.

1 Id., Art. 9.1.


"Ce faisant, l'Agent s'engage ases frais a:(i) servir la clientele et gerer ses affaires afin de maintenir etdevelopper l'image de marque attachee aux Produits;(ii) solliciter avec diligence des commandes de Produits aupres desclients;(iii) mettre en oeuvr-e tous les moyens commerciaux et administratifsnecessaires (y compris en personnel) pour assurer la promotion desProduits et la bonne execution du present Contrat;(iv) faire son affaire personnelle de sa propre organisation, asavoirbureaux, personnel, deplacements, correspondance, etc ... et asupporter directement toutes les charges y afferentes, en particulier en matiere fiscale et sociale."

The last of these examples is particularly explicit. The first thing tonote is that the expression "best efforts" is reinforced by the words "in themost active manner" and that the agent's duties are set out in detail. Thescope of "best efforts" in this example is comparatively wide, although thedetails provided refer to other criteria that remain subject to interpretation("diligently," "to use all necessary methods," "to take personal responsibility"). To refer to a distinction originated in French law, one could considerthis to be reinforced "obligations de moyens" or even, in some cases, "obligations de resultat."!J

The following IS an example of a clause providing for a negativerequirement:

"The Agent will diligently and faithfully serve the Principal as itsAgent and will use his best endeavours to promote the sale of thegoods of the Principal within the Area and will not do anythingthat may prevent such sale or interfere with the development ofthe Principal's trade in the Area."

b. Construction Agreements

How does a building contractor undertake to complete the promisedwork? Often a contract will require that the work be performed with agiven degree of care. For instance:

"The Contractor shall, with due care and diligence, design (to theextent provided for by the Contract), execute and complete theWorks and remedy any defects therein in accordance with the provisions of the Contract. ..."

5 On these notions, now integrated into the Unidroit Principles, see infra, pp.218-222.


This clause, which appeared in a FIDIC contract,!') is very often used inother types of construction agreements; but what does "with due care anddiligence" mean?

The following example seems more demanding:

"The contractor shall, commencing within days of the EffectiveDate of the Contract, proceed with utmost diligence and care incarrying out all of the Services specified as his obligations in theContract. ..."

In many cases, the term will be accompanied by a reference to businessnorms, as in this clause relating to the duties of an engineering consultant:

"The Consulting Engineer shall exercise all reasonable skill, careand diligence in the performance of the Services under theAgreement and shall carry out all his responsibilities in accordancewith recognized professional standards."

A further example deals with the duties of an architect:

"In providing the service to the Client, the Architect shall exercisea reasonable standard of skill and diligence normally expected andaccepted by the profession of architecture."

In French language texts, the corresponding provision will often referto the "r-egles de l'arl," i.e., to the accepted standards of the trade concerned:

"L'entrepreneur garantit que ses prestations, travaux et montageseront realises selon les regles de l'art, en conformite sur tous les plansavec les lois, les decrets, les reglements, les prescriptions et normesen vigueur en Tunisie lors de la signature du Marche."

The examples above define the general duties of contractors or otherprofessionals in the construction industry. Other terms covering conductare found in connection with more specific obligations.

In the following clauses, relating to the use of materials obtained locally,keeping the peace in the workplace and continuation of work in the eventof war, the term "best efforts" is used:

Ii Conditions of Contract for Works of Civil Enbrineering Constructions, 1987 ed., Part I,General Conditions, Art. 8.1. It will, however, be noted that the corresponding provisionsof the most recent set of FIDIC contracts have eliminated this reference to the notion"wilh due care and diligend' in their description of the Contractor's obligations (Condilionso!Conlrar:l[rJr Conslnu;lion, 1st ed., 1999, Art. 4.1; Condilions o!Conlrar:l.forPlanl arulDesignBuild, 1st eel., 1999, Art. 4.1; Conditions of Contract for EPC Turnkey Projects, 1st ed., 1999,Art. 4.1).


"With respect to any materials, supplies, goods, equipment or services purchased, leased, contracted for or otherwise obtained orrequired by the Contractor in the performance of the work, theContractor shall use his best efforts to utilize materials, supplies,goods, equipment or services of Saudi Arabian origin or whichmay be obtained or acquired from entities organized under thelaws of the Kingdom."

In this case, "best efforts" appears to involve at least several actions,which are defined and capable of proof, such as requests for local tender;on the other hand, if the fact of having contracted elsewhere can be justified by the lack of a given product in the local market, the provisionbecomes more difficult to construe if the alleged justification is linked todifferences in waiting periods, quality, reliability, etc.

"The Contractor shall at all times during the progress of the workstake all requisite precautions and use his best endeavours to prevent any riotous or unlawful behaviour by or amongst his workmen, labourers and others employed on, or in connection with,the works, and for the preservation of the peace, protection of allinhabitants, and the security of property on or In the neighbourhood of the site."

Here, by contrast, the scope of the obligation appears a priori less clear.The required steps, to satisfy the obligation to use "best endeavors," willcertainly depend on local circumstances.

"If during the currency of the Contract there shall be an outbreakof war (whether war is declared or not) in any part of the worldwhich whether financially or otherwise materially affects the execution of the Works, the Contractor shall until the Contract is terminated under the provisions in this clause contained use his bestendeavours to complete the execution of the Works provided alwaysthat the Employer shall be entitled at any time after such outbreakof war to terminate this Contract by giving notice in writing to theContractor and upon such notice being given this Contract shall terminate but without prejudice to the rights of...."

This is not a jor-ce majeure clause, which would free the contractor fromhis obligation in case of war. Here he is required to continue the work, butthe "best endeavors" clause in this case reduces the scope of the originalobligation in view of the circumstances.

In the next case, pertaining to the preservation of access routes to thesite concerned, the duty is to use "every reasonable means":


"The Contractor shall use every reasonable means to prevent anyof the highways or bridges communicating with or on the routesto the Site from being damaged or Injured by any traffic of theContractor or any of his Subcontractors and in particular shallselect routes, choose and use vehicles and restrict and distributeloads that any such extraordinary traffic as will inevitably arise fromthe moving of plant and material from and to the Site shall be limited as far as reasonably possible and so that no unnecessary damage or injury may be occasioned to such highways and bridges."

The meaning of "reasonable means" here is clarified by a few examplesand the objective to be attained is stated. In such a case, damage is withoutdoubt considered inevitable and the contractor's duty is limited to doingwhat is "reasonably possible" in order to avoid all "unnecessary damage." Itshould be noted, however, that here again it is a question of "reasonablemeans" rather than "best endeavors." Do these two terms differ in scope?

c. Manufacturing of Materials and Parts for Motor Vehicles

In a contract between a car maker and firms producing materials andspare parts, the quality standard is set by references to the current state ofscience and technology, to safety regulations and certain agreeed technicaldata, as well as to the adoption of a quality management system:

"Der Lieferant hat fur seine Lieferungen den Stand von Wissenschaftund Technik, die Sicherheitsvorschriften und die vereinbarten technischen Daten einzuhalten. Er muE ein entsprechendes Qualitatsmanagementsystem (z.E. DIN EN ISO 9000 ff., VDA-Schrift 6.1 o.a.) einrichten und nachweisen."

d. Research Agreements

It is only too true that the popular maxim "seek and you shall find"does not apply to the legal obligations of a researcher. A research agreement requires research to be done, but there is no guarantee of its success.One author interprets the researcher's duty as a "sublimation" of an obligation of best efforts: not only can the results not be guaranteed, but themeans cannot be defined and their use cannot be measured. 7 It is, however, possible to attempt to define the required depth of the research andterms of the "best efforts" type often appear in research agreements.

Below is a clause taken from the standard terms used by the West German Ministry of Defense in its research contracts with the private sector:

7 Cl. Renard, Les contrats de recherche, in Aspects fUTidiques de la Techerche scientijique,Liege and The Hague, 1965, pp. 47-49.


"Der Auftragnehmer kommt seinen Verpflichtungen zur Durchflihrung der Enwicklungsarbeiten nach, wenn er sich nach bestenKriiften bemiiht, unter Ausnutzung des neuesten Standes vonWissenschaft und Technik und unter Verwertung der eigenenKenntnisse und Erfahrungen das bestmogliche Ergbnis zu erzielen."8

Here "best effort" is defined by the dual reference of taking into accountthe most up-to-date scientific development and using the researcher's ownexperience.

e. Technical Assistance Agreements

Technical assistance agreements require the provider of the assistanceto carry out various duties, the scope of which is often measured by theyardstick of "best efforts" or some similar criterion. The quality of theresults obtained does not, in fact, depend exclusively on the provider of thetechnical assistance; the beneficiary of the assistance must also be able totake advantage of what he has received. This concern is manifest in the following clause:

• "(Le donneur) ne peut cependant se porter garant ni de la productivite du personnel local, ni de la rentabilite de la Brasserie, etune insuffisance de productivite ou de rentabilite ne pourra servirde motif au non-paiement de la remuneration due (au donneur)en vertu du present contrat, dans la mesure ou aucune faute nepeut lui etre imputee en application de l'alinea qui precede."

• "(Le donneur) s'engage aexercer la mission qui lui est confiee demaniere consciencieuse et repondra de toute faute que n'aurait pascommise un pTOfessionnel normalement competent et raisonnable.

The qualifications in the first paragraph invite substantial comment.According to some interpreters, the words "in a conscientious manner" arenot very demanding. To say that someone is a "conscientious" worker is certainly not to heap praise upon him. The reference to professional normsmay go some way towards altering this impression, although the formulation does not appear to involve any particular stringency. The first paragraph, therefore, seems primarily to serve as an introduction to the second,which is the real nub of the clause.

In the next example, the accent is on the duty to use best efforts topass on the techniques concerned, a duty considered to be "clear" since theprovider's remuneration is pardy linked to the turnover achieved. Does thiswording not limit the liability of the party undertaking the duty to the loss

8 Cf. CI. Witz & Th. M. Bopp, Best Efforts, Reasonable Care: considerations de droitallemand, &v. Dr. AI! Int., 1988, p. 1036.


of his remuneration? The most explicit confirmation that the best effortsdo not in any way amount to a guarantee of success appears in the following example:

"While A cannot guarantee the technical success of the process, heobviously will make the best effort to provide the necessary technology available since A's compensation for the technology will hepartially derived from a percentage of sales of N.C."

The provision of technical assistance may entail certain specific obligations, for example, the duty to carry out formalities necessary for any staffrelocation:

"Le Client fera toutes les demarches necessaires ou utiles et deploieratous ses efforts pour l'obtention en temps opportun de toutes lesautorisations necessaires pour permettre (i) au personnel locald'encadrement de suivre Ie programme de formation prevu enEurope, et (ii) aux agents de ... d'effectuer leur mission, y compris non-limitativement l'obtention des visas pour ceux-ci et lesmembres de leur famille et les permis de travail."

In a clause such as this, does the undertaking to "use every effort" addto the undertaking to "take all necessary and useful action"?

The following example relates to a different matter. Here, it is the veryduty itself to provide technical assistance that is qualified, and not the manner in which the assistance is to be provided:

"Dans la mesure de ses possibilites, PRIMO fera egalement beneficierSECUNDO de son assistance technique pour les etudes de partiesmecaniques dont les caracteristiques techniques entreraient dansIe cadre de l'annexe III.

Les conditions dans lesquelles seraient entreprises ces etudes et laresponsabilite incombant aPRIMO ace titre seront definies caspar cas d'un commun accord."

This is close to an undertaking that is purely discretionary (and therefore without legal effect), except insofar as it might be held that a refusalto provide assistance may only flow from objective difficulties and is notentirely at PRIMO's sole discretion.

The following clause states a similarly weak duty:

"ALPHA's team will do its best to try to introduce adjustments inthe PLANT equipment, for the manufacture of such counts, with


the understanding that such counts having never been manufactured by ALPHA, ALPHA is not in a position to transmit any dataand/or information relating to such production."

f. Trademark and Patent Licence Agreements

As in certain technical assistance agreements, clauses in licence agreements describing the manner in which techniques are to be passed on aresometimes combined with clauses seeking to limit or exempt from liability:

''Whilst the Owner will take all reasonable care in giving the licenseethe Owner's Formulae and Know-How and in laying down theStandards of Quality, the Owner accepts no responsibility inrespect thereof or the plant used to manufacture the licensedProducts or the production and distribution thereof and all guarantees or warranties (whether statutory express or implied) in connection therewith are hereby excluded and the Owner shall not beliable whether in contract, negligence or otherwise for any injury,damage, loss, costs, claims or expenses of any kind in any wayattributable or alleged to be attributable to any of them."

In this example, the very wide and general nature of the exemptionfrom liability (the validity of which would clearly be questionable undermany legal systems) practically nullifies the whole effect of the duty to use"all reasonable care" in passing on the technology.

The same contract confers on each of the parties two specific obligations under the category "best efforts":

• "The Owner may further require that the Licensee ... uses its bestendeavours to recover any below standard products which havebeen previously distributed."

• "The Owner shall throughout the period of the Permission ... useits best endeavours to ensure that no person to whom permissionhas been granted outside Benelux for the sale of the LicensedProducts shall be permitted to advertise or promote,or otherwiseseek customers for, the Licensed Products in Benelux or establishany warehousing, storage facilities or distribution or selling agencies for the Licensed Products in Benelux."

Insofar as the duty to recover defective products is concerned, it canbe considered that, here, the expression "best endeavors" has a very definite scope. There are quite specific actions to be taken under such circumstances, and perhaps even a series of preventive measures that couldbe taken so that, if necessary, the retrieval procedure could commence


rapidly and efficiently so as to reduce as far as possible its prejudicial effectson the brand image of the product.

The duty to prevent competition between sellers in other territorialareas also involves certain concrete steps, beginning with the inclusion ofclauses in the agreements forbidding export outside the area covered bythe agreement (subject, of course, to problems with the validity of suchundertakings in light of competition law).

g. Satellite Launch Agreements

In contracts under which they undertake to put satellites into orbit,both NASA and the European Space Agency use the concept of "bestefforts" to qualify the scope of their obligations.

"All Launch and Associated Services to be furnished by NASA tothe User under this Agreement shall be furnished by NASA usingits best efforts."

For such a type of especially risky transport contract, the classical obligation to reach the specific promised result is replaced by an obligation ofbest efforts.

However, it has been said by a NASA executive that the inclusion of thisexpression would have a more radical effect, namely of exempting theAgency from all liability:

"The concept of "best efforts" means that NASA and the customer agreethat a legal action will not be brought against NASA or its contractors basedon an express or implied provision of the LSA for damages or other relieffor any delay in the provision of launch services, or for the non-performance or improper performance of launch service."9

This is a surprising conclusion. While in other circumstances,1O theresearch group wondered if the effect of the reference to "best efforts"might be to reinforce the impact of the duty, one of the parties to the contract here appears to think that it amounts to an exemption from liability.Obviously a satellite launch is a very risky operation, and it is understandable that a party cannot take upon itself a very strict obligation. However,

9 Johan E. O'Brien, The Structuring of NASA Launch Contracts, Report to theColloquium Organized in Paris, on December 5-6,. 1985, by the International Chamberof Commmerce, p. 5. Cf. also L. Ravillon, I~es telecommunications par satellites-Aspectsjuridiques, Paris, Litec, 1997, pp. 209-213.

10 See for instance supra, p. 196, concerning the recall of defective products.


we find such an assimilation between "best efforts" and exemption from liability debatable. I I It is true that the simultaneous presence of certainexemption clauses in NASA contracts creates a further problem of interpretation; the existence of that problem prevented American courts fromexpressing a clear stand on the scope of the best efforts clause in itself. 12

Supposing that NASA's interpretation was upheld, the validity of suchan exemption from liability would be questionable under many legal systems, as it renders meaningless the obligations undertaken by the satellitelaunching party. 13

As a consequence of these difficulties, more recent NASA contractstend to replace the notion of "best efforts" by a reference to "reasonableefforts."14 The notion is probably more objective,I5 but ambiguities remain.

h. Letter of Comfort

A letter of comfort is intended to reassure a party, contracting with asubsidiary, of the support that the parent company is prepared to give itssubsidiary in the event it encounters difficulties. I6 The letter will often becouched in fairly vague language, since the author will be seeking to avoidformulating precise obligations. Here is a typical example:

"Nous n'avons pas coutume de garantir les credits accordes anosfiliales.Cependant, de longue date notre politique est de maintenir notresoutien envers ces compagnies et de nous assurer qu'aucun etablissement preteur n'encourt de perte a la suite des relations d'affaires avec nos filiales queUe qu'en soit la cause. Cette politiquesera suivie avotre egard quant ala ligne de credit que vous accordezanotre filiale."

11 This opinion is shared by L. Ravillon, Of). cil., p. 210.

12 Martin Marietta Corp. v. Intelstat, 991 F.2d 94, 97 (4th Cir. 1993), commented byL. Ravillon, ap. cit., pp. 211-212.

13 Cf. infra, Chapter 7, and especially p. 385.

14 L. Ravillon, of). cit., pp. 214-215.

15 Cf.in:fra, pp. 214-217.

16 Cf. Faculte de Droit de Namur & Feduci, I~es lettres de patronage, Namur and Paris,1984; M. De Vita, Lajurisprudence en matiere de lettres d'intention. Etude analytique,Gaz. Pal., 1987, pp. 667-670 (in spite of its deceptive title, this study deals with lettersof comfort); M. Elland-Goldsmith, Comfort Letters in English Law and Practice, Rev. Dr;Ai! Int., 1994, pp. 527-541; cf. also supra, Chapter 1, pp. 6-8.


Sometimes, however, a letter of comfort will go further:

"If the Borrower is unable, for any reason, to effect any paymentunder such agreement when due, we shall use our best efforts inorder to have funds available to the Borrower ... by any appropriate means in amount sufficient to make any such payment."

Several members of the Working Group were of the opinion that inthis case, the words "we shall use our best efforts" could be construed as anexpectation of a very specific undertaking, approaching an "obligation toachieve a specific result." The author of the letter promises that the necessary funds will be made available if necessary. What is involved is a veiledguarantee of the debtor's obligations, except for the fact that funds will notbe passed directly to the creditor but will be supplied to the subsidiary inorder to allow it to meet its obligations itself.

Similar comments were made as to the undertaking expressed in thefollowing letter of comfort to "do everything in its power":

"La Soci<:~te X, s'il en etait besoin, ferait tout ce qui serait en son pouvoir pour mettre la Societe Y en mesure d'assurer la bonne execution des engangements pris par elle en ce qui concerne Ieremboursement des prets prevus, tant pour Ie principal que pourIe reglement des interets et accessoires."

In the above example, the interpretation of the wording is that the parent company pledges the necessary support to its subsidiary. The impact ofthe terms "best efforts" and "everything in its power" in this respect would,therefore, be very demanding.

Much case law has appeared on these problems, at least in France, witha variety of interpretations. 17

i. Documentary Credit

The Uniform Customs and Practices for Documentary Credits make astand against imprecise terminology. Thus, according to Article 46b of the1993 edition:

"Expressions such as 'prompt,' 'immediately,' 'as soon as possible,'and the like should not be used. If they are used banks will disregard them."

17 Cf. the decisions cited by M. De Vita, id., and, more recently, Casso fr., Oct. 15.1996, Dall., 1997,].,330; Paris,June 31997, Da}l., 1998,].,5; Cass. fr.,Jan. 26,1999, Dall.,1999,].,577.


The same rules, though, incorporate such formulae when it comes tothe verification obligations placed on bankers:

• "Art. 7 a. A Credit may be advised to a Beneficiary through anotherBank (the "Advising Bank") without engagement on the part ofthe Advising Bank, but that bank, if it elects to advise the Credit,shall take reasonable care to check the apparent authenticity of theCredit which it advises...."

• "Art. 13 a. Banks must examine all documents stipulated in theCredit with reasonable care, to ascertain whether or not they appear,on their face, to be in Compliance with the terms and conditionsof the Credit. Compliance of the stipulated documents on theirface with the terms and conditions of the Credit, shall be determined by international standard banking practice as reflected inthese Articles...."

What is "reasonable care"? The expression dates from the 1962 revisionof the Uniform Customs and Practices. Before that, a bank was required to"carefully" examine the documents. Does the change in wording constitutea slight difference in the strictness of the bank's obligation? Does the word"reasonable" reduce the degree of care required?

j. Counter-Trade Agreements

In a counter-trade contract, the supplier under the principal contractundertakes, by a separate contract, to buy compensation goods for anamount equal to a certain percentage of the value of the principal contract. This undertaking to accept goods in counter-trade may be performed by a third party, but it is binding, as the usual inclusion of apenalty clause confirms. IS

In the following example, however, the counter-trade obligation tookon a restricted form:

"Gegenstand dieses Ubereinkommens ist der Gegenkauf tschechoslowakischer Ware in Zusammenhang mit dem Hauptvertrag.Firma A wird zum Gegenkauf jedenfalls ihr Bestes tun, urn ihreVerpflichtungen zu erfiillen, wobei ins Auge gefasst ist, dass die folgenden Punkte von tschechoslowakischer Seite bevorzugt werden:"Maschinen und Anlagen von X, Prag,"Maschinen und Anlagen von Y, Prag,"Andere Maschinen,"Andere tschechoslowakische Giiter."

IS Cf. M. Fontaine, Aspectsjuridiques des contrats de compensation, D.P.C.I, 1981,pp. 179-223.


This seemingly exceptional clause invites a variety of questions. Whatmeaning can one read into the undertaking to "do one's best" in order togive some substance to the obligation? It should be noted that there is noteven a clear statement of the amount of the required counter-trade, whichincreases the impression that this clause will hardly be enforceable. Couldit not be said that the counter-trade obligation has been reduced to such alevel that it resembles little more than some kind of brokerage undertaking, where there is a promise to devote "best efforts" to finding purchasers(compare the examples given above concerning sales promotion)?19

k. Acquisitions of Companies

According to a practice that has developed since the first edition of thisbook, the expression "due diligence" has come to be used with a particularmeaning, in fact, a specific operation. Before acquiring shares in a company, the purchaser or his agents investigate the financial situation of thecompany at stake. This audit itself has come to be called "due diligence."

Here is a first example of a clause putting such an operation together:

"Article 4. Diligence of (Company X). As of the Effective Date,Purchaser or Purchaser's representatives, counselors and officers shallhave the right to inspect and examine the books and records pertaining thereto, and they shall have access to (Company X's) booksand records, at all reasonable time during the Term, to the extent necessary for the proper performance of the due diligence and the application of the terms and conditions herein contained ..."

Originally, "due diligence" was a qualification of the manner in whichthe purchaser had to run this inspection; the seller thus intended to protect himself against any later claims. But gradually, practicioners started touse the expression to define the investigation itself. One does the "due diligence" of such or such company.

This evolution had to be explained, since, for specialists in acquisitions,the expression "due diligence" means this type of inspection. Such meaningobviously goes outside the scope of the present study, which concerns the different ways in which contract drafters express the force of an obligation.

2. Types of Clauses

a. Duty of Confidentiality20

The duty of confidentiality frequently includes criteria of the "bestefforts" kind. Here is a first example:

19 Cf. Cl. Witz & Th. M. Bopp, op. cit., pp. 1036-1037.

20 Confidentiality clauses are thoroughly examined infra, Chapter 5.


"Visitor will use all reasonable efforts to prevent disclosure of anyand all of Said Confidential Information furnished directly or indirectly by PRIMO to Visitor."

There is often a real difficulty in policing the respect for confidentiality clauses and the phrase "all reasonable efforts"; the present case may perhaps suggest a degree of resignation in anticipation of this.

It is, however, possible to be more precise; witness the following clausetaken from a licence agreement:

"Licensee shall for a period of ten years from and after the date ofeach disclosure hereunder, exercise all reasonable efforts to keep(Licensor) 's know-how disclosed In such disclosure secret and confidential. In fulfilling this operation, licensee shall use at least thesame standard of care in safeguarding (Licensor) 's know-how fromunauthorized disclosure as it uses in safeguarding its own confidential technical information and know-how."

The reference to the standard of care used by one party in the protection of its own information here enables the scope of "reasonable efforts"to be more clearly defined; it sets up a minimum standard ("at least"). Onemay still remain skeptical as to the efficacy of such clauses. The expressionused allows the parties to reach agreement for now, but there will probablybe difficulties later if a conflict arises.

b. "Porte-Forf' and "Good Offices"

• "Si PRIMO ou SECUNDO obtiennent d'un tiers une licence dansIe domaine technique du present accord, elles s'efforcerontd'obtenir les memes droits aux memes conditions pour Ie partenaire du present accord."

• "PRIMO s'engage afain; tout ce qui est en son pouvoirpour faire procurer aSECUNDO un montant de "x" millions de F pour couvrirune partie des besoins financiers qui seront necessaires a l'execution du plan industriel."

• "A undertakes to make all reasonable endeavours so that none ofthe companies from either the ... Group of Companies or from ...Group of Companies operating at ... are deprived of their supplies of water, electricity, telephone or telex and it will use its bestefforts to cause the necessary agreements for separate supplyarrangements in respect of such supplies to the entered into byand between the relevant companies and/or the competentauthorities as soon as possible."


The above are examples of three obligations to obtain undertakingsfrom third parties, where the expressions used ("will endeavor to," "doeverything in its power," "use its best efforts") seem to constitute commitments to appropriate means. Satisfactory performance of such undertakings will certainly involve carrying out certain minimum actions, butno guarantee of success is given. Under French law, it would be a question of a promise to use "bons offices" ("good offices") rather than apromise of "portejort" (an obligation to obtain an undertaking from athird party), where the promissor would normally be under a duty toachieve that result. 21

The Group pondered the effect of the inclusion in the third clause ofboth "reasonable endeavors" and "best efforts." Do they suggest differentdegrees of duty? Or is it simply a question of the draftsman's concern toavoid repetition by choosing two expressions considered to be synonymous? Alternatively, should we be led to believe that the author of theclause was simply drafting without giving any particular attention to theterms he was using?

c. Force Majeure and Hardship Clauses

Force majeure clauses in international contracts often place a duty onone or both of the parties to attempt to overcome the obstacle concernedin order to allow the performance of the contract to be resumed. 22

Here are two examples:

• "... parties shall exercise all due diligence to minimize the extentof the prevention or delay in the performance of the contractgenerally. "

• "In case of Unabwendbar-e GewaIt (fora majeure) the parties mustmake all reasonable efforts to eliminate or overcome the consequences of such an event. In this regard the parties shall workclosely together and shall establish a new delivery plan within thelimits of their possibilities. The parties are to keep the damagesresulting from Unabwendbare Gewalt as small as possible and to takewhatever measures are necessary in this regard."

The very nature of certain cases of fora majeur-e prevents any absoluteformulation of the duty to overcome the obstacle; very often it will not bepossible (for example, the item to be delivered has been destroyed and

21 Cf. Ph. Malaurie & L. Aynes, Droil civil. Les obligalions, 10th ed., 1999-2000,No. 683.



cannot be replaced, or a new regulation, which cannot be discarded, prevents performance of the contract, etc.). The obligation can, therefore,amount only to a duty of best efforts, but it may be expressed in differentways. Is "all due diligence" synonymous with "all reasonable efforts," or dothe two expressions refer to different degrees of requirement? And what ofa clause requiring a party to use its "best efforts" in the same circumstances?

A similar situation arises where the contract, on the occurrence of anevent of force majeure, requires an alternative mode of performance. In thenext example, it should be noted that the expression "all necessary steps"is clarified by an illustration of what this might involve:

"The Seller and the Buyer will co-operate in order to obtain government approvals necessary to perform this Contract in any countries requiring such approvals.

"Should for whatsoever reasons these approvals be denied or otherwise not obtained, the party responsible for obtaining suchapprovals will take all necessary steps to ensure the same result tothe other party by changing the manner in which the transactionis consummated in such a way as to avoid the need for the government approval denied or delayed. Such steps may include thedesignation by the Buyer of a buying entity located outside of thecountries where the companies included in the Stock are located."

"Reasonable efforts" has been replaced by "necessary steps," and theresult is, probably, a higher degree of requirement.

A hardship clauses obliges the parties to enter into renegotiationswhen certain events occur that seriously affect the equilibrium of the contract. 23 Trying to find a new agreement requires mutual cooperation. Suchrequirement is phrased with a reference to "reasonable endeavors" in thefollowing excerpt from a hardship clause:

"... if in the course of this agreement unfairness to either of (theParties) is anticipated or disclosed then the Parties will use all reasonable endeavours to agree upon and thereafter to take such actionas may be necessary to remove the cause or causes thereof."

d. Obligation to Mitigate Losses

In the case of failure to perform a contractual obligation, currenttrends of the law of contract, greatly influenced by the concept of goodfaith, impose on the victim of the non-performance, the injured obligee,an obligation to mitigate his losses. 24

23 On such clauses, d. ir~fra, Chapter 9.

24 Cf. B. Hanotiau, Regime juridique et portee de l' obligation de moderer Ie dom-


Such a duty, where it arises, must be qualified. The reference to "reasonableness" often appears in as the measures to be taken.

"Les parties s'efforceront de n~aliser les objectifs qu'elles se sontproposes d'atteindre par Ie contrat. En particulier, la partie quisouffre de l'inexecution d'une obligation doit prendre toutes lesmesures raisonnables, pour reduire au minimum Ie prejudice susceptible d'en resulter. Faute par elle d'agir de la sorte, elle ne peutobtenir de l'autre que la reparation du prejudice qu'elle ne pouvait eviter."

Provisions of this type appear in some international instruments:2s TheVienna Convention on the International Sales of Goods refers to "such measures as are reasonable under the circumstances" (Article 77: see also Article86). The measures to be taken must be "reasonable," but must also takeaccount of the "circumstances," i.e., of the fact that an obligation is imposedon the injured party itself. "Reasonable," in this case has a restricted meaning.26 The Unidroit Principles exonerate the obligor in default from indemnifying the harm "... to the extent that (it) could have been reduced by the(obligee)'s taking reasonable steps" (Article 7.4.8).27 The same criterium of"reasonableness" appears, here without the additional reference to circumstances. The Comments to this provision state that "it would be unreasonable from the economic standpoint to permit an increase in harm whichcould have been reduced by the taking of reasonable steps." A dual reference to "reasonableness"!

B. Observations Concerning Practice

Two main conclusions may be drawn from the illustrations set out above.

1. The expressions used to define the quality of the performancerequired are varied, but can for the most part be grouped into several categories.The first category requires the obligor to provide the best he can:"best efforts," "best endeavors," "every effort," "everything in its

mage dans les ordres juridiques nationaux et Ie droit du commerce international,I.H.I")., 1987, pp. 393-405; M. Elland-Goldsmith, La "mitigation of damages" en droitanglais, I.B.LJ, 1987, pp. 347-361; Y Derains, L'obligation de minimiser Ie dommagedans la jurisprudence arbitrale, I.B.LJ, 1987, pp. 375-382; S. Litvinoff, Damages,Mitigation and Good Faith, 73 Tulane Law Rev., 1999, pp. 1161-1195.

25 Cf. S. Reifegerste & G. Weiszberg, Obligation to Mitigate Loss and the Concept of"Reasonableness" in International Commercial Law," I.B.LJ, 2004, pp. 181-197.

26 On this provision, d. C.M. Bianca & M.J. Bonell, CO'fn'rnentary on the InternationalSales Law. The 1980 Vienna Sales Convention, Milan, 1987, pp. 559-567 and pp. 620-624.

27 A similar provision exists in the Principles of European Contract Law (Art. 9:505).


power," "to the best of its ability," "to the best of its experience,""the best it can," etc.A second category refers to the criterion of "reasonableness": "allreasonable efforts," "all reasonable means," "reasonable care," "allreasonably possible efforts," etc.A third category covers the concept of diligence: "with duediligence," "in a diligent manner," "with utmost diligence andcare," etc.A fourth category covers the recognized standards of the industryconcerned: "selon les regles de [,art," "in accordance with recognizedprofessional standards," "in accordance with good engineeringpractice," "entspn!chend dem Stand von Wissenschaft und Technik," etc.These criteria are sometimes used in combination: "in every reasonable and proper way and to the best of his ability," "all reasonable skill, care and diligence," "with the diligence of a responsiblebusinessman," etc.

2. The above examples are taken from contracts and clauses which,at first sight, appear varied. Among the duties defined by the relevant terms are in particular:promotion of sales of a product in a defined market;performance of construction works;use of materials obtained locally;ensuring good labor relations in the workplace;continuation of work in the event of war;carrying on research;supply of technical assistance;carrying out steps to obtain governmental authorizations:withdrawal of defective products:prevention of use of competing technology by third parties;satellite launches;guarantees of solvency of a subsidiary:verification of conformity of documents;purchase of counter-trade products;protection of the confidential nature of certain information;obtaining various commitments from third parties;overcoming obstacles to performance of contractual obligations;choosing and implementing measures aimed at restoring the equilibrium of the contract;mitigating the damages flowing from a breach of contract.

Besides their variety, these duties, for the most part, share a commonfeature in that they all involve a degree of difficulty so that there can be noabsolute guarantee that the desired result will be achieved. Sales may bedeveloped, but to what extent? Work may be carried out, but doubtless it


will not be perfect. Research may be pursued, but it may never bear fruit.Attempts may be made to recall defective products, but it may be impossible to retrieve all of them. A substantial risk will remain that the satellite launch will fail, and so on. The party undertaking the duty thuscannot commit itself too strictly, but the contract will try to define a minimum degree of diligence with which it must comply: its "best efforts,""reasonable care," "due diligence," the "accepted standards of the relevant industry."

The list above, however, includes some anomalies. Some of the obligations listed do not involve the same degree of difficulty of performance asothers. It is possible to pledge an absolute undertaking to guarantee thesolvency of a subsidiary. The same applies to the purchase of counter-tradegoods. We commented above that in spite of its formulation, the undertaking would have to be interpreted strictly (letter of comfort), or wepointed out the unusual nature of the obligation (counter-trade).

As to these anomalies, each of which demonstrates an attempt by oneof the parties to restrict the normal scope of its obligation, the terms wehave studied are not used in connection with undertakings that are generally capable of absolute performance (save where an outside exemptingcause intervenes, such as force majeure, in the legal system recognizing this).Thus, one does not find clauses whereby one of the parties undertakes onlyto use "its best efforts" or "all reasonable care" to pay a price, royalties orrent, to hand over an item that has been sold, to transport goods or toreturn borrowed, hired or bailed property.

This study relates to undertakings whose successful performance cannot be ensured in advance. If no absolute promise of performance can begiven, the expressions are used to define, to a greater or lesser degree, theintensity of the relevant party's obligation. It now remains to analyze theseexpressions.

III. ANALYSIS, ATTEMPT AT SYNTHESIS

A. Critical Analysis

Four main groups of terms are used to define the quality of an obligation: "best efforts," "reasonable efforts," "due diligence" and the relevant,accepted "trade" or "industry standards" (regles de l 'art), with the many possible variations.

1. "Best Endeavours" and "Best Efforts"-English and American Interpretations

"MeilleuTS efforts" and "beste Kriifte" appear in contracts in French and inGerman, but the expression "best efforts" seems to have originated inEngland or the United States. In both countries, a variety ofjudicial pro-


nouncements have been delivered in relation to the concept, the tendencybeing to prefer "best endeavors" in the England and "best efforts" in theUnited States. 28

(a) Turning to English law,29 the courts have sometimes been puzzledby the terms "best endeavors"; thus Goff]. said:

"I ask myself, could anything be less specific or more uncertain?There is absolutely no criterion by which 'best endeavours' andpracticability are to be judged."3o

The same uncertainty appeared in another judgment:

"Perhaps the words 'best endeavors' in a statute or contract meansomething different from doing all that can reasonably be expected-although I cannot think what the difference might be."31

In general, however, the courts have tried to clarify the meaning to begiven to the expression. The leading authority dates from 1911, andresulted from a case in which a railway company had undertaken to use its"best endeavors" to develop the business of another company. The judgment states:

"We think 'best endeavours' means what the words say; they do notmean second-best endeavours. We quite agree with the argumentof Mr Balfour Browne that they cannot be construed to mean thatthe Great Central must give half or any specific proportion of itstrade to the Sheffield District. They do not mean that the GreatCentral must so conduct its business as to offend its traders anddrive them to competing routes. They do not mean that the limits of reason must be overstepped with regard to the cost of the service: but short of these qualifications the words mean that theGreat Central Company must, broadly speaking, leave no stoneunturned to develop traffic on the Sheffield District line."32

Another contract contained a clause requiring a purchaser to use his"best endeavors" to obtain planning permission. Buckley LJ. said:

2S Compare the Romanian arbitral cases based on the former C.M.E.A. conditions,commented by O. Capatina, La clause "best efforts" dans les contrats conclus par lesentreprises roumaines de commerce exterieur, R.D.A.!., 1988, pp. 1044-1046.

29 Part of the cases which will be mentioned are also commented by M.D. VarcoeCocks, Best Endeavours, The Law Society sGazette, 1986, pp. 1992-1993.

30 Bower v. Bantam Investments Ud, (1972) 3 All E.R. 349, 355.

31 Oversea Hayers Ltd v. Granadex SA, (1980) 2 Lloyd's Rep. 608.

32 Shejfield DistTict Railway Co v. Great Central Railway Co, (1911) 27 TLR 451.

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"I can feel no doubt that, in the absence of any context indicatingto the contrary, this should be understood to mean that the purchaser is to do all he reasonably can to ensure that the planningpermission is granted. If it were refused by the Local PlanningAuthority, and if an appeal to the Secretary of State would have areasonable chance of success, it could not, in my opinion, be saidthat he had 'used his best endeavours' to obtain the planning permission if he failed to appeal ... I cannot find ... any contextwhich satisfies me that the words 'use its best endeavours to obtainconsent' could be construed otherwise than in accordance withwhat I take to be their clear, primary and natural meaning."33

A more precise formula appeared in a case where "best endeavors"were to be used in order to complete an acquisition by a certain date:

"'Best endeavours' are something less than efforts which go beyondthe bounds of reason, but are considerably more than casual andintermittent activities. There must at least be the doing of all that reasonable persons reasonably could do in the circumstances."31

Although some of these stances may be criticized as seeking to explainan uncertain concept by reference to another equally uncertain terms, thegeneral attitude of the courts seems to be to give a particularly strict meaning to the undertaking to use one's best efforts: "'best endeavors' do notmean second-best endeavors."35

More recently, the House of Lords has recognized the legally bindingcharacter of an undertaking to use one's "best endeavors," at the same timeas the House denied such character to an agreement to negotiate "in goodfaith."3G The Court of Appeal has confirmed this position concerning "bestendeavors. "37

33 IBM United Kingdmn Ltd v. Rockware Glass Ltd, (1980) FSR 335.

31 Pips (I~eisure Productions) Ud v. Walton, (1980) 43 P & CR 415.

35 However, an undertaking to exert one's "best endeavors" cannot be absolute; itmust sometimes yield to other concerns. Thus, in a case where shares were to be transferred, the assignee company and its banks had undertaken to use their best endeavorsto obtain the shareholders' approval. At that moment came a draft legislative modification which would have made the operation prejudicial to the assignee company. Thiscompany and its banks then made sure that the shareholders would not grant theirapproval. The tribunal admitted such conduct under the circumstances, in spite of the"best endeavors" clause (Rackam v. Perk Food Ud, BCLC 1990).

36 Walford v. Miles (1992) 2 AC 128.

37 Pitt v. PHH Asset Management Ltd (1994) 1 WLR 327. We thank Professor M.P.Funnston, who drew our attention to the last two cases cited.

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(b) American case law has also produced some interpretations of thetwin concept of "best efforts."38

The Falstaff brewery had promised "to use its best efforts to promoteand maintain a high volume of sales" of the products of the Ballantinebrewery, having acquired a large number of Ballantine's assets and agreedto pay royalties on the sales achieved. Later, however, having suffered lossesin connection with this activity, Falstaff decided to promote its own beer inpreference to that of Ballantine, the result of which was that sales of the latter fell and, in consequence, so did the royalties.

The court held that Falstaff had breached its undertaking:

"Although the best efforts clause did not require Falstaff to spenditself into bankruptcy to promote ... Ballantine ... it did preventthe application ... of (a) philosophy of emphasizing profit liberalles without fair consideration of the effect on Ballantine volume. [Ballantine] was not obliged to showjust what steps Falstaffcould reasonably have taken to maintain a high volume forBallantine products. It was sufficient to show that Falstaff simplydidn't care about Ballantine's volume.... The burden thenshifted to Falstaff to prove there was nothing significant it couldhave done to promote Ballantine's sales that would not havebeen financially disastrous."39

One may note, in particular, from this judgment the court's interestingidea of allocating the burden of proof.

In other cases, the American courts have not had to interpret express"best efforts" clauses, but have found implied undertakings to use bestefforts, and have also sought to define the concept.

The starting point is the decision in Wood v. Lucy, Lady Duff Gordon,4owhere Judge Cardozo found consideration for a right to demand royaltiesin the context of an exclusive agency agreement for fashion items, by virtueof an implied undertaking to use "reasonable" efforts to make the operation profitable. Later decisions have confirmed this interpretation by using,without distinction, the expressions "best efforts" and "reasonable efforts,"which were considered to be interchangeable.41

38 Cf. also sUfJra, pp. 197-198, about the particular case of satellite launching contracts.

39 Bloor v. FalstaJIBrewing Corp., 601 F.2d 609 (2d Cir. 1979).

10 222 N.Y 88,118 N.E. 214 (1917).

41 Cf. IILM Curf). v. GeneralFoods Corf)., 365 F.2d 77 (3d Cir. 1966); Lawrence S. Long,Best Efforts as Diligence Insurance: in Defense of "Profit Uber Alles," 86 Col. Law Rev.(1986), p. 1728 and note 6.


A group of Catholic priests sold a manufacturer the exclusive rights tomanufacture and distribute records of an opera that they had written,"Virgin." The contract required the manufacturer to spend$ 50,000 on promoting the work unless, "in the manufacturer's sole judgment, such promotion would cease to be effective and profitable." The promoter invokedthis clause to justifY ending all promotional activity. The court held that, inspite of the terms of the provision, the decision was not at the promoter'scomplete discretion. The promoter had assumed an implied obligation touse his "best efforts" to ensure the promotion of "Virgin," and the onus wason him to prove that he had not failed in this. 42

In another case, an American judge took a less rigorous view of thewords "best efforts." A Mr. Zilg had written a Marxist-inspired biography ofthe Du Pont family (Du Pont: Behind the Nylon Curtain), and Prentice-Hallhad obtained exclusive rights to decide on the printing, sale price, style ofpublication and all aspects of its promotion. Following the extremely negative reaction of a book club, Prentice-Hall greatly reduced the print runand the publicity budget. In this case, the court held that in the absence ofan express "best efforts" clause, the editor had adequately fulfilled his obligations by initially exerting appropriate efforts and then reducing them substantially on the basis of poor commercial prospects. In this case, the onusof proof of breach of the contract fell on the plaintiff, Zilg.13

The cases prompted some interesting commentaries in legal literature.Lawrence S. Long formulated three possible meanings of the term "bestefforts": the most demanding placed on the party undertaking the obligation a "fiduciary duty" requiring it to subordinate its own interest to that ofthe party to whom it owed the duty. None of the decisions cited above supports this interpretation. At the other extreme, the interpretation referredto by the author as "diligence insurance" meant that the interests of theparty undertaking the obligation was of primary importance; this partywould bear no risk of liability except where its lack of effort went so far asto prejudice its own interests. This was the Zilg interpretation, where thepublisher was not liable when it justified its cessation of efforts by claimingthat it had little hope of making a profit. A midway position would requirethe interests of both of the parties to be taken into account, as in theFalstaff/Ballantine case or that of the religious opera. Long argued in favorof the "diligence insurance" interpretation, which he believed was the mosteffective in economic matters. 44

42 Conlemf)OTary Mission, Inc. v. FarrwLls Music Cmf)., 557 F.2d 918 (2d Cir. 1977).

43 Zilg v. Prentice-Hall, 717 F.2d 671 (2d Cir. 1983), ccrt. denied, 466 U.S. 938 (1984).

11 Lawrence S. Long, op. cit., pp. 1728-1740.


Farnsworth showed that the level of the duty imposed by the words"best efforts" can increase according to different criteria, which he drewfrom American case law. 45

One possibility is for the party owing the duty and the party to whomthe duty is owed to be considered as one. The question is then one ofdegree of care that such a person ought reasonably to have exercised in thegiven situation. This interpretation might, in particular, be sufficient todetermine the level of effort required from an agent.

On the other hand, it may not be possible to consider the two parties asone, if the party undertaking the duty has been chosen by virtue of its specialabilities, for example, a barrister or an architect. In such cases, "best efforts"are to be interpreted by reference to the reasonable care and level of competence that one would normally expect from a professional in that field.

Various difficulties arise when the two have opposing interests. Thus, apublisher who undertakes to use his best efforts to promote work whoseprospects of success are slim, the author being paid by a commission onsales, would fall into this category. If we look to the reasonable behavior ofa professional in a given field, we must accept that a publisher should beable to stop promoting a book, placing its own interests first (this is the Zilgreasoning mentioned above, after the initial promotional activity hadfailed). Another possibility in this case would be to return to the first interpretation and to consider the parties as one in order to take as the objectof the "best efforts" the volume of sales that would maximize the combinedprofit of the partners.

Goetz and Scott are of this opinion in a remarkable study where theysought to identify the elements that characterize "relational contracts," i.e.,contracts that bind the parties into a given relationship for a certain duration, the full evolution of which cannot be foreseen at the start.16

15 E.A. Farnsworth, On Trying to Keep One's Promises: The Duty of Best Efforts inContract Law, 46 Univ. oj Pittsbur:g:h loaLl! Rev. (1984), pp. 9-13; cf. also E.A. Farnsworth,Conlnu;ls, 2nd ed., vol. II, 1998, pp. 381-388.

46 Cf.]. Goetz & R.E. Scott, Principles of Relational Contracts, 67 Virt,rinia Law Rev.(1981), pp. 1089-1150. On this approach of contracts, also see 1.R. Macneil, The ManyFutures of Contracts, 47 Southern Calif. loaw Rev. (1974), pp. 691-816; 1. R. Macneil,Contracts: Adjustment of Long-Term Economic Relations Under Classical, Neoclassicaland Relational Contract Law, 72 Northwestern Univ. Law Rev. (1978), pp. 854-905; D.Campbell, The Social Theory of Relational Contract: Macneil as the Modem Proudhon,18Int.j. oJ the Sociology oJloaw (1990), pp. 75-95; A. Schwartz, Relational Contracts in theCourts: An Analysis ofIncomplete Agreements and Judicial Strategies, 92 TheJ q!LegalStudies (1992), pp. 271-318; N. Nassar, Sanctity of Contracts Revisited-A Study in the Theoryand Practice ofLong-Tem/, International Commercial Transactions, Maninus Nijhoff, 1995, 297pp.;]. Oechsler, Wille und Vertrauen im privaten Austauschvertrag-Die Rezeption des


The allocation of risks cannot be dealt with in a precise manner at thetime when the contract is concluded, so the contract will contain certainfairly indeterminate provisions. The level of obligations required maytherefore be defined by the standard of "best efforts. "47

However, the authors were concerned with the uncertainty of this term.They wrote:

"Perhaps the most poorly understood class of relational contracts isthat involving agreement wherein one party explicitly, or even implicitly, undertakes the contractual duty of using its "best efforts" to carryon an activity beneficial to the other.... The precise legal meaningto be attached to a best efforts requirement is not at all clear."18

By reference to a graphical analysis setting out the curves of marginalcosts and marginal revenue,49 Goetz and Scott suggested that the conceptof "best efforts" amounted, for the distributor whom they were using as anillustration, to an obligation to achieve a volume, which could be gaugedfrom the graph, where the combined profits of the two parties were maximized. This would be a plausible interpretation of the will of the majorityof the parties to contracts, and a solution that complied with the demandsof distributive justice.

Certainly, the authors continued, one could not expect a party undertaking a "best efforts" obligation to try to achieve this level of duty if it didnot have adequate information as to its partner's accounts. Besides, enforcing such a requirement would entail strict policing procedures. We shouldnot allow these reservations to make us lose sight of the effective extrajudicial role that the inclusion of such a duty can play, particularly in the fieldof commercial ethics:

Theorie des Relational Contract im deutschen Vertragsrecht in rechtsvergleichenderKritik, RabelsZ. JUT ausl. und intern. Pr7vatrecht, 1996, pp. 91-124.

17 In the words ofN. Nassar, "Under the relational model, the goal of contract lawis not limited to ensure enforceability, certainty and delimiting rights and duties. Rather,it is more concerned with establishing the boundaries and aims of the institution orpractice of contracting. Contract law is there to provide for the continuity of relationships through resolution of conflicts and correcting for market changes and failures thatmay arise during the course of performance. Solutions adopted under contract law primarily should be concerned with furthering all the different interests involved. This isusually attainable through the articulation of legal standards which, contrary to technical rules, are inherently flexible. Fairness and good faith, defined in reference to bestefforts, become the backbone of contract law through which mutual trust between thecontracting parties is promoted" (N. Nassar, Of). cit., p. 24).

4S Ch.]. Goetz & R.E. Scott, op. cit., p. 1111.

19 Id., p. 1113.


"Notwithstanding practical difficulties of securing legal enforcement, therefore, a contractual provision also has value simply as acommunication of understanding between the parties as to theirmutual rights and duties. Hence, the inclusion of a best effortsterm may, at a minimum, serve as signal alerting good faith bargainers that the proposed contractual relationship is one in whichspecial concerns are to be considered. "50

The concept of "best efforts" has thus been the subject of various comments in the United States. The courts' approach has been guarded bothas to the scope of the concept as well to evidential concerns flowing fromit. At least three recent studies have analyzed the case law and suggesteddifferent interpretations. There is no unanimity but the analysis has beengreatly refined: in one case, a graphic representation of the concept of"best efforts" has even been proposed.

2. "Reasonable" in Common Law and Civil Law

"Reasonableness is indeed, we might all admit, a good thing initself, even if, like moderation, good only within reason and inmoderation. What is less clear, and certainly less easily agreed orsettled, is what actually it is reasonable to do, to say, to conclude orto doubt in a given context."51

The concept of "reasonableness" is, however, widely used in law, particularly in common law,52 although it is not unknown in certain civil lawsystems.53 In some cases, the author of the legal rule (be it legislator ordraftsman of a contract) will use the term "reasonable" to qualify a conceptto unburden himself of the necessity of formulating a precise rule and leaving the resolution of any ensuing litigation to the ulterior interpretation bythe courts, on this general criterion. In other cases, the court itself maytake the initiative to determine what is reasonable when giving the motivesfor its decision ("it seems reasonable to believe") .51

50 Id., p. 1117.

51 N. Mac Cormick, On Reasonableness, in I~es notions it contenu variable en droit,Brussels, 1984, p. 131.

52 Cf. G. Tixier, La regIe de "reasonableness" dans la jurisprudence anglo-americaine, Rev. Dr. Publ. Sc. Pol., 1956, pp. 276-298; V. Amar & Ph. R. Kimbrough, Esprit degeometrie, esprit de finesse, ou l'acception du mot "raisonnable" dans les contrats dedroit prive americain, D.PC.l, 1983, pp. 43-56.

53 Cf. R. Legros, L'invitation au raisonnable, Rev. Reg. Dr., 1976, pp. 5-13; Ch.Perelman, Le raisonnable et Ie deraisonnable en droit, Arch. Phil. Dr:, 1976, pp. 35-42;G. Khairallah, Le "raisonnable" en droit prive fran~ais-Developpementsrecents, Rev.Trim. Dr; Civ., 1984, pp. 439-467. Compare the German concept of "Zumutbarkeit," refered to by Cl. Witz & Th. M. Bopp, Of). cil., pp. 1030, 1033.

54 J.A. Salmon, Le concept de raisonnable en droit international prive, MelangesReuter, pp. 449-451.


Legislators frequently use the term. To cite but a few significant examples, in the United States, the Uniform Commercial Code refers to the concept of "reasonableness" in numerous provisions (see, for example,Sections 1-204,2-305 and 2-309). The English Unfair Contract Terms Act1977 also makes many such references (see in particular Articles 1(1 ), 2 (2) ,3(2),4(1),6(3),7(3), etc.), and then goes on to devote a whole scheduleto the definition of the term.!):) The 1980 Vienna Convention onInternational Sales of Goods includes innumerable references to the concept of "reasonableness" (see in particular Articles 8, 18, 25, 33, 34, 37, 38,39, 43, 44, 46, 48, 49, 65, 72, 75, 77, 79, 86, 87 and 88). The definition ofa defective product in the European Directive ofJuly 25, 1985 refers to the"the use to which it could reasonably be expected that the product wouldbe put" (Article 6). The Unidroit Principles of International CommercialContracts also make entensive use of the "reasonable" standard (d. Articles1.8,2.20,3.5,3.9,4.1,4.2,5.2,5.3,5.4,5.6,5.7,5.8, 6.1.1, 6.1.16, 6.1.17,6.2.2,6.2.3, 7.1.5, 7.1.6, 7.1.7, 7.2.2, 7.3.1, 7.3.2, 7.3.4, 7.3.6, 7.4.4, 7.4.5,7.4.6,7.4.8,8.4 and 9.1.12). The same can be said about the Principles ofEuropean Contract Law.

The draftsmen of international contracts are no different. Besidesnumerous references to the word "reasonable" to define periods of time,events of justification, evidence required, etc., which are not within thescope of this study, the term frequently appears in relation to the mode ofperformance of obligations. We cited above many examples of the use ofthe words "reasonable care," "reasonable efforts," etc.

What does the word "reasonable" mean? Doubtless, it is necessary todistinguish between "reasonable" and "rational." "Reasonable" in the present context, does not mean "logical"; it does not mean conforming to "reason" in the philosophical sense, but conforming to "reason" in the practicalsense-to common sense, to generally accepted value judgments.56 This"practical reason" applies in situations where the standard of behaviorrequired depends on taking into consideration and pondering a numberof factors, the different circumstances capable of influencing the decisionto be taken.57 Thus, a carrier required to take "reasonable care" of goodsmust investigate methods of preservation and packaging such goods, howfragile they are, the transport risks that threaten them, etc.58

55 Schedule 2: Guidelines/or a!J!Jlicalion q! Reasonableness Tesl.

56 J.A. Salmon, ap. cit., pp. 447-448; compare G. Khairallah, ap. cit., pp. 456-460.

57 N. Mac Cormick, ap. cit., p. 136. Schedule 2, attached to the English Unfair CantractTerIfl.s Act, gives a list of different factors to consider in order to determine the reasonableness of a contractual clause.

5S G. Khairallah, ap. cit., p. 464.


The person who takes good decisions is the "reasonable man," similar without doubt to the French"bon pere de famille," a concept derivedfrom the venerable "bonus paterfamilias."59 The way in which a contractingparty behaves and the interpretation of the concept of "reasonable care"or "reasonable efforts" is measured by reference to the actions of this reasonable man.

We have, however, still not given any definitions. How do you definethe use of "practical reason"; how do you give a judicious evaluation of thedifferent factors present? It is possible to list the typical actions of the "reasonable man,"60 yet it is almost impossible to define him without being tautologous.

Reference is often made to behavior that is usual in the circumstances,"reasonable" being very closely connected to what is generally accepted ina given social context. 6J The requirement can be reinforced by the addition of references to the behavior of an "experienced" or "prudent" person, having concern for the interest of all the parties. 62 This, however,

59 Cf. S. David-Constant, Le bon pere de famille et l'an 2000, ]ourn. Trib. (Brussels),1982, pp. 152-153.

60 This can be done with humour, as in the following description: "(The ReasonableMan) is one who invariably looks where he is going, and is careful to examine the immediate foreground before he executes a leap or bound; who neither star-gazes nor is lostin meditation when approaching trap-doors or the margin of a dock; who records inevery case upon the counterfoils of cheques such ample details as are desirable, scrupulously substitutes the word "Order" for the word "Bearer," crosses the instrument "alcPayee only," and registers the package in which it is despatched; who never mounts amoving omnibus, and does not alight from any car while the train is in motion; whoinvestigates exhaustively the bona fides of every mendicant before distributing alms, andwill inform himself of the history and habits of a dog before administering a caress; whobelieves no gossip, nor repeats it, without firm basis for believing it to be true; who neverdrives his ball till those in front of him have definitely vacated the putting-green whichis his own objective; who never from one year's end to another makes an excessivedemand upon his wife, his neighbours, his servants, his ox, or his ass; who in the way ofbusiness looks only for that narrow margin of profit which twelve men such as himselfwould reckon to be "fair," and contemplates his fellow-merchants, their agents, and theirgoods, with that degree of suspicion and distrust which the law deems admirable; whonever swears, gambles, or loses his temper; who uses nothing except in moderation, andeven while he flogs his child is meditating only on the golden mean. Devoid, in short, ofany human weakness, with not one single saving vice, sans prejudice, procrastination, illnature, avarice, and absence of mind, as careful for his own safety as he is for that of others, this excellent but odious character stands like a monument in our Courts ofJustice,vainly appealing to his fellow-citizens to order their lives after his own example" (A.P.Herbert, Uncornrnon I~aw, pp. 3-4). The author goes on to point out that in all case law,"there is no single mention ofa reasonable woman" (id., p. 5).

61 G. Tixier, op. cit., pp. 282-283.

62 Cf. Stanolind Oil and Gas Corp. v. Sellers, USCA, 1949, 174 F.2d 948, cited byV Amar& Ph. R. Kimbrough, op. cit., p. 52.


remains a circular definition: what is a "prudent" person? "Reasonable"does not mean "heroic"; it is not a question of sacrificing everything on thealtar of duty. Although a certain degree of strictness is expected of this "reasonable man," how is that degree to be established?

The Working Group spent a considerable amount of discussion timetrying to define the concept of "reasonable" diligence. Although we couldnot come up with any completely convincing definition, a way of distinguishing between the two expressions "reasonable efforts" and "bestefforts" has been suggested. It seems that "reasonable efforts" may be moreobjective. It refers to what will generally be considered necessary to bedone in similar circumstances. "Best efforts," on the other hand, will beinterpreted by reference to the abilities of the person undertaking the dutyitself, which makes this latter term more subjective. 53 In fact, the wordingof clauses refers, on the one hand, to "all reasonable efforts" or "all reasonable means," and, on the other hand, when speaking of the person whoowes the duty, to "its best efforts." Sometimes the two criteria seem complementary: the formulation "in every reasonable and proper way and tothe best of its ability," far from being redundant, would combine both concepts, requiring of the person under the duty both that it do its best andthat it conform to generally expected norms of behavior.

However, all generalizations are dangerous. Furthermore, we mustremember that civil lawyers care in defining concepts and setting theboundaries of categories is far from being shared by common lawyers. InAmerican case law, "reasonable efforts" and "best efforts" are considered tobe inter-changeable;64 and for an Englishjudge, "best endeavors" are "allthat reasonable persons reasonably could do."65

Finally, "reasonable" seems, in certain cases, to have a mitigating effecton terms to which it is applied. It is no longer a question of referring towhat the reasonable man would generally do, but of accepting that, in viewof the circumstances, one cannot ask too much of the party undertakingthe duty. Such was the interpretation given above by the Working Group tothe "reasonable efforts" required to safeguard confidential information(given the great difficulty of preventing leaks), and to the "reasonable measures" required for mitigating losses (bearing in mind that, after all, it is theother party in such cases that is in breach). This is an important shade ofdifference, given that even the reasonable man himself might, to somesmall degree, be a little less vigilant in certain circumstances while nevertheless remaining true to character.

63 See a similar opinion in Cl. Witz & Th. M. Bopp, op. cit.

64 Cf. supra, pp. 210-214.

65 Cf. SLlfJTfL, p. 209.


3. "Due Diligence," "All Diligence," Obligations to Appropriate Means

(a) The term "due diligence" is very frequently used in contracts alongside "best efforts" and "reasonable care" to qualify the type of performanceexpected of the person under the duty. An agent must "diligently" seekorders from his clients, a contractor must carry out the work "with due careand diligence," or "with reasonable skill, care and diligence," the parties mustexercise "all due diligence" to mitigate the effects of an event of for"Ce majeure.

Here again, any attempt at definition runs into serious difficulties. It isimpossible to define such concepts precisely, which are used for the veryreason that it is not possible to be more precise, if not to avoid being moreprecise.

"Diligence," in French as in English, appears to imply no more than"efforts."GG It is the fact of trying to do something. It may also suggest anelement of speed ("to be diligent"). What is most important, however, isprobably the definition of the degree of "diligence" required. When it mustbe "reasonable," we are thrown back to the earlier discussions of "reasonable efforts." When it is stated to be "due" diligence, it seems that themeaning of this expression is similar. "Due" means what we expect: is thatnot the behavior of the "reasonable man"? In another case describedabove, a contractor undertook to supply his services "with utmost diligenceand care"; here the requirement was specifically reinforced: the "reasonable man" must make greater efforts than those that would normally beexpected of him. Above all, however, we note that in every case, the formulations are abstract: they refer to the standard of care generallyexpected and not to that of the particular party under the duty. It is notasked to use "his diligence," as it was required to use "his best efforts." Inthe applications found by the Working Group, the term "diligence" wasused with reference to a general standard of behavior, like the criterion of"reasonableness" examined above. 67

We would therefore put "due diligence" with "reasonable efforts" inthe category of abstract standards, in contrast with the more subjective connotations of "best efforts." Here again, however, care must be taken. Wemust not be overly systematic where reality is very fluid.

(b) For lawyers in the French system or certain similar systems, anobligation of "diligence" evokes the concept of an "undertaking to appro-

66 The same can probably be said about terms like "care" ou "soins."

67 Compare, formerly, Section 67-D, 2° the CMEA General conditions of supply:"The care generally taken in relationships of a given kind shall be taken into consideration as a criterion for determining fault" (d. also Section 67-E, 3°) (0. Capatina, op.cit., pp. 1044-1046).


priate means" (" obligation de moyens"). Above, in the commentaries thataccompany the illustrations of contractual practice, several references weremade to the distinction between such undertakings and "undertakings toachieve a promised result" (obligations de resultat). For some it is temptingto try and amalgamate several of the formulae examined above with thesetwo types of duty.

The distinction is constantly used by lawyers in the French tradition. 68

It is based on the idea that in certain cases, a party will undertake toachieve a given result (a classic example would be the carrier who promisesthat goods will be delivered), whereas in other cases, a party will undertakeonly to act as a "good family man" with a view to achieving the result, butdoes not guarantee it (a classic example of this would be the doctor whoundertakes to treat a patient, not to cure him). The distinction is of greatpractical interest. If the result is not achieved, a party who accepts anundertaking to achieve a specific result is, prima facie, in default, and theonus will be on it to try to establish justification, whereas in the case of anundertaking to appropriate means it will not be the party undertaking theobligation, but the party benefitting from it, who will bear the burden ofproving that adequate means were not used with the degree of diligencerequired. The distinction relates, therefore, both to the scope of the dutyand to the burden of proof in the case of default.

The characterization of a given obligation as an undertaking to appropriate means or to achieve a specific result will depend on various factors.Its wording may be decisive. When a party promises in absolute terms to dosomething, subject only to the possibility of establishing an outside groundofjustification in the event that it fails, this reveals an "obligation de r-esultat."On the other hand, an "obligation de moyens" will arise where a party undertakes "to use all diligence" in carrying out the duty promised. Where thewording of the contract is uncertain, it will be for the court to decide, byreference primarily to the degree of risk that threatens the success of theservice promised. If it is a question of an obligation that normally ends ina positive result (for example, an undertaking to pay a price or delivergoods), the court will doubtless classify it as an undertaking to achieve aspecific result. If performance would normally involve difficulties of a typesuch that success cannot be guaranteed (for example, defending a clientin an action at law or bringing round a company with financial difficulties),it will be considered to be an undertaking to appropriate means.69

6S Conceived by Demogue, (Twite des obligations, V, Paris, 1948, No. 1237), it permitted to solve a long-lasting controversy about the respective scopes of Articles 1137 and1147 of the Civil Code. Cf. J. Frossard, I~a distinction des obligations de rnoyens et des obligations de resullat, Paris, 1965; G. Viney & P. Joirdain, Traite de droit civil, vol. N, LesObligations, La responsabilite, conditions, Paris, 2nd ed., 1998, pp. 440-544.

69 A thorough discussion of these problems under French law is found in G. Viney,op. cit., pp. 641-651.


The two categories of obligations to appropriate means and undertakings to achieve a specific result are not sufficient to cover all of the situations that may arise. Beyond undertakings to achieve a specific result, legalliterature has also defined a class of "guarantee obligations" (obligations degarantie) , where the party accepting the obligation gives an absolute undertaking, without reserving any right later to set up a ground ofjustification.70

On the other hand, freedom of contracts permits many other formulations,restricted or extended undertakings to appropriate means, undertakingsto achieve a specific result similarly relaxed or reinforced, etc. Legislatorsthemselves make use of shades of difference. The "good family man" isreferred to in Article 1137 of the Napoleonic Code (relating to the safekeeping of objects), the text that was the basis for the development of theconcept of obligations to appropriate means. The "good family man" similarlyappears, inter alia, in Articles 1374 (relating to unauthorized management of another's affairs), 1728 (use of objects on hire) and 1880(safekeeping of objects on loan). Article 1137, paragraph 2, however, statesthat "the scope of this duty will be greater or smaller under different contracts," and Article 1927, for example (keeping of objects on deposit),replaces the criterion of the "standard of care of the good family man" withthat of the "same standard of care as (the bailee) would use in keeping hisown property." Here, the normally objective nature of the undertaking asto appropriate means becomes slightly more subjective.71

Obligations to appropriate means and obligations to achieve a specificresult, therefore, constitute no more than two basic categories. Nevertheless, lawyers in the French tradition very often refer to these two categories for the purpose of analysis.

How far does this French "tradition" extend? Certainly to Belgium. wherethese concepts are in constant use;72 but they are also applied in other jurisdictions such as the Netherlands,73 Italy,71 Quebec75 and Romania.76

70 Cf. B. Gross, I~a notion d 'obligation de garantie dans le droit des contrats, Paris, 1964;J.L. Fagnart, Les obligations de garantie, Melanges BrJ/ugniel, Brussels, 1976, pp. 233-262.

71 Cf. H. De Page, Traite elhnentaire de dmit civil belge, V, 2nd eel., Brussels, 1975, No.198 (but compare Article 1928, where the bailee's liability is reinforced in certain cases).

72 Cf. H. De Page, op. cit., II, 3rd ed., Brussels, 1964, No. 596; P. Van Ommeslaghe,Les obligations. Examen de jurisprudence 1974-1982, Rev. Cri!. .fur: B., 1986, pp.215-217.

73 J.D.A Den Tonkelaar, Resultaatsverbintenissen en inspanningsverbintenissen, Zwolle,1982; AS. Hartkamp, Verbintenissenrecht, I, 8th ed., Zwolle, 1988, No. 184.

74 L. Mengoni, Obbligazioni "di resultati" e obbligazioni "di mezzi," Riv. Dir: Cornrn.,1954,pp. 185-209,280-320,365-396.

75 Cf. P.A. Crepeau, I/intensite de l'obligation juridique ou des obligations de diligence, deresuJlal el de garanlie, Centre de recherche en droit prive et compare du Quebec, 1989,232 pp.

76 E.A Barasch, 1. Filip & O. Capatina, Considerations sur la classification des oblig-


In some other civil law countries, the concepts of obligations to appropriate means and obligations to achieve a specific result are scarcely recognized. Under German law, they are not generally used, although asimilar approach takes place with the comparison in the Civil Code (BGB)between the Dienstvertrag (service contract) (Sections 611-630) and theWerkverlmg (work contract) (Sections 631-651); in the first type of contract,a party undertakes to perform services, whereas in the second, the undertaking is to perform a definite type of work. 77 In their excellent introduction to comparative law, the German authors Zweigert and Katz refer to theFrench distinction, but they appear to treat it as an isolated development. 78

In common law, one would expect such concepts to be formallyrejected. Is not contractual liability objective, free of any idea of fault,whereas in the case of an obligation to appropriate means, fault must beproved and in the case of an undertaking to achieve a specific result it willbe presumed? In theory, Anglo-American law treats all contractual obligations as guarantees, non-performance of which will, of itself, amount to abreach of contract giving rise to liability for damages. 79

Nevertheless, aside from all attempts to impose too rigid a set of rulesto govern contractual liability, does not the distinction between obligationsto appropriate means and obligations to achieve a specific result correspond to real-life experience, where certain undertakings involve too greata degree of difficulty and uncertainty to be the subject of unconditionalundertakings promising success? In the common law countries as elsewhere, when it is not realistic to give a more strict undertaking, the partyundertaking an obligation promises no more than to use "every diligence,"or its "best efforts." Professor Farnsworth himself, who specifically compared the American law concept of "best efforts" to the French system ofobligations to appropriate means, wrote that:

"our common law counterpart of the French obligation to appropriate means is, of course, the duty of best efforts."80

The distinction between obligations de moyens and obligations de resultathas recently gained a significant international consecration with its inclusion in the Unidroit Principles. Article 5.4 makes an explicit distinctionbetween a duty to achieve a specific result and a duty ofbest efforts. In the latter

ations civiles en obligations de resultat et en obligations de moyens (in Romanian),Studii si cercetari juridice, 1971, pp. 583-590; O. Capatina, op. cit., pp. 1049-1050.

77 Cf. Cl. Witz & Th. M. Bopp, Of). eil., p. 1035.

7S K. Zweigert & H. Katz, An Intmduction to Comparative Law, tracl. T. Weir, 3rd ed.,Oxford, 1998, pp. 501-502.

79 !d., p. 503.

so E.A. Farnsworth, op. cit., p. 4.


case, the obligor "is bound to make such efforts as would be made by a reasonable person of the same kind in the same circumstances." The veryinteresting Article 5.5 then attempts, for the first time in a codification, todefine criteria to distinguish between those two types of obligations: suchcriteria are largely inspired by case law that had developed on the subjectin France and in Belgium.81

The considerations above cannot lead to an over-simplified analysis."Best efforts," "reasonable care" and "due diligence," as emphasized above,often refer to the performance of obligations whose success is not guaranteed, and in this respect they, in fact, contain elements of obligations toappropriate means. On the one hand, the distinction between obligations demoyens and obligations de resultat provides only two basic formulae that arecapable of numerous variations and shades of difference. Furthermore, ourinvestigation of contractual practice has shown that the phrases studied areused in a great variety of contexts, sometimes giving rise to other interpretations. We have also tried to distinguish subjective expressions of the "bestefforts" type from objective ones of the "reasonable care" and "due diligence" type. Any amalgamations of the various expressions should, therefore, be approached with great caution.82

Nevertheless, the comparison cannot be avoided and the idea of obligations to appropriate means makes it easier to understand the conceptsthat are the subject of this study.B3

4. References to Business Norms

The quality of the performance expected is sometimes characterizedby reference to business norms.B4 An engineering consultant will undertaketo provide his services "in accordance with recognized professional standards"; an architect will undertake to exercise a "reasonable standard ofskill and diligence normally expected and accepted by the profession ofarchitecture"; a contractor will undertake to carry out work according to"accepted industry standards"; the supplier of technical assistance will beresponsible for any error that "a reasonable professional person with a nor-

/;1 In French law, d. G. Viney & P. Jourdain, Traite de la responsabilite civile. Les conditions de la responsabilite, Paris, 2nd eel., 1998, No. 536-555; in Belgian law, S. Stijns, P. Wery& D. Van Gerven, Chronique dejurisprudence. Les obligations: les sources (1985-1995),](JLan. Trib. (Brussels), 1996, pp. 723-724.

/;2 In Romanian law, the notion of best efforts is analysed as referring to a reinforcedobligation as to appropriate means (d. O. Capatina, op. cit., pp. 1048-1050).

83 Comp.J.M. Mousseron, TedlniqLle conluu;LLlelle, Paris, 2nd ed., 1999, No. 1085-1086.

84 On the legal aspects of norms in general, d. Commission Droit et vie des affairesde la Faculte de droit de Liege, Le droit des norrnes professionnelles et techniques, Brussels,Bruylant, 1985; A. Penneau, Regles de l'art et norrnes techniques, Paris, L.G.DJ., 1989.


mal degree of competence" would not have made.s:) Several examples havebeen given above.

These criteria seem to be more precise than previous ones, since theyrefer to requirements peculiar to the professional field in which the partyundertaking them is involved.s6 It is no longer a question of the "reasonableman" but of a professional person qualified in the area in question. True,some of the formulae cited above do combine different terms, including"diligence" and "reasonable." Nevertheless, the particular factor that characterizes these clauses is the reference to professional qualification.

Obviously, it is expected that a professional person will act in a professional manner; that is why his services are engaged. A professional personis not an amateur; he can call on technical education, experience, adequately trained staff and the requisite information. If he undertakes to render a service in his professional capacity, clearly he must use theseresources in carrying out his undertaking. No other meaning can be attributed to the requirement that he perform his duties "in accordance withrecognized professional standards."

Expressions such as these are more precise, since their meaning can beestablished in a relatively objective way. Thus, the accepted industry standards that a contractor must meet can be found in the specialized literature, the standards set up by different organizations, the conditions of thecontract for works, the building regulations, etc. 87 An example has beengiven of an explicit reference to such norms imposed on suppliers of materials and spare parts for motor vehicles.88 In the event of litigation, it isobviously easier to determine the way in which a professional, qualified inthe area concerned, ought to have acted than to decide merely how a"good family man" would have behaved.

There is, however, no radical difference. In considering the behaviorof a "good falnily man," a "diligent man" or a "reasonable man," we cannot

85 On such references to professional standards in German law, d. Cl. Witz & Th. M.Bopp, Of}. cil., pp. 1031, 1034, 1038, 1040.

S6 It will be noticed that in the four examples just given, only one refers explicitly tothe obligor's specific profession (the architect). There seems to be no doubt, however,that the "professional standards" applicable to the engineering consultant are those ofits trade.

S7 Cf. M.A. Flamme, Agn::er les entreprises ou agreer et contr6ler les produits?,l/entreprise et ie droit, 1981, p. 320; cf. also A. Penneau, La notion de regles de l'art dansIe domaine de la construction, Rev. Dr. Irnrnob., 1988, pp. 407-417; M.A. Flamme & Ph.Flamme, Le amlral d'enlrefJTise, Quinze ans dejurisf}r/uleru:e (1975-1990), Brussels, 1991, pp.42-43,146.

88 Cf. supra, p. 193.


stay resolutely on the fence. This imaginary figure is often put in the samesituation as the party undertaking the duty,89 which renders it similar to theprofessional person. Still, the expression does not possess the samedemanding character.

A reference to business norms is not always in and of itself sufficientlyprecise when activities of varying technical levels are found in a given field.Are the "accepted industry standards" the same for a small contractor inthe construction industry as for a company that undertakes to build a vastindustrial complex? Obviously not. Certainly, the reference to theseaccepted industry standards will imply that it is a question of standardsadapted to the particular type of work. However, for any particular job, theperson commissioning the work can call on a more or less specialized contractor; if he chooses a less experienced company, which may offer a moreattractive price, should the "professional standards" of the more qualifiedcompetitors still apply?

Such questions are highly relevant in the context of international contracts. If the "accepted industry standards" consist of all the standardsapplied in the industry concerned, they will nevertheless not be the samein every country. Take the case of a French businessman who undertakes tocarry out building works in Indonesia according to "accepted industry standards"; are the rules to be applied those relating to the French, or to theIndonesian construction industry? The question is important in a technical context and also perhaps in a legal context, if the legal regime governing warranties is held to be part of the "accepted industry standards." Somemembers of the Working Group thought that there would be an unacceptable difference in the treatment of businessmen from different countries if each was required only to conform to its national standards, whichmight be more or less exacting; others, however, emphasized that theclient, in choosing the contractor, weighs up carefully the level of technical expertise and the nature of the warranty that it could provide.

The conclusion to be drawn from the above is that a reference to professional standards is worth clarifying when there is a difference betweenthe qualifications of the party undertaking the duty and the standards thatthe other party wishes to apply to the undertaking, or when there may besome doubt because of differences in standards from one area to another. 90

89 H. De Page, Traile elernenlaire de droil civil beZrse, II, 3rd ed., Brussels, 1964, No. 588;G. Viney, Of}. cil., No. 462, 530.

90 Considering the rapidity of technical progress, it is sometimes advisable to be precise about the moment at which the industry standards applicable to the promised performance are to be determined. May the obligor be satisfied with performing inconformity with the standards existing when the contract was concluded, or must perfonnance be adapted to technical progress occurred since then? On these questions, d.Cl. Witz & Th. M. Bopp, op. cit., pp. 1039-1040.


In one example given above, the necessary clarification was provided: the"accepted industry standards" were to be interpreted according to the standards in force in Tunisia, the place of performance; but such clarificationis often lacking.

B. Attempt at Synthesis

The nature of the subject makes it difficult to reach very systematicconclusions. Some guidelines may be stated, but subject to numerous qualifications.

Take the case in which the draftsmen of the contract seek to state adequately an obligation that one of the parties is prepared to undertake. Itis to be a relatively complicated obligation; the party undertaking it cannotpromise perfect results.

In what way is that party to work? Efforts can be more or less intensiveand the draftsmen will seek to state the degree of effort required. On thisoccasion, the dialectic of negotiations will oppose the beneficiary of theobligation, trying to express exacting requirements, and the party undertaking the obligation, concerned about not being placed under too strict aduty. The formula adopted will be governed by the negotiating skills andbargaining power of each-assuming that each is really aware of the impactof the choice of words.

1. Basic Citeria

(a) One way is to look at the degree of effort of which the party undertaking the obligation is capable. It may be required to do its best or to useits best efforts. The party benefiting from the duty knows its partner andexpects it to use all its abilities in its service. This subjective criterionimplies, in particular, that less is required of a small enterprise retained toperform ajob than of a highly specialized partner. The party undertakingthe duty agrees to use its abilities to their best effect to carry out thepromised work. It is, however, still an exacting requirement: the partyundertaking the duty must use its best efforts.

One may further wonder, whether what is required are the best effortsof which that party is capable or those that it uses to carryon its own business. Certain clauses use the latter criterion. Sometimes it constitutes a concession, where the intention is not to require a level of duty greater thanthat which the party concerned would use on its own account91 : but it isoften used to increase the duty, based on the observation that that partytakes great care in its own affairs.

91 In this line, perhaps, cf. Article 1927 of the Napoleonic Civil Code (cf. supra,p. 220), with regard to keeping of objects in deposit.


(b) A different formulation takes account of what is normally expectedof a party undertaking an obligation of this type, who performs its obligation properly: "due diligence," "reasonable efforts" or, following the oldRoman formula, the care of the "bonus paterfamilias." The term takes a turnfor the abstract; it is no longer a question of referring to the competenceof the contracting party itself; it is required to act in the manner generallyexpected of a diligent person in the same circumstances. This approach is,in itself, neither more nor less demanding than the previous one, ratherit moves onto a different plane. "Normal behavior" is a sort of average, difficult for a party lacking in resources to achieve but well within the capacity of a sophisticated party.

(c) The third possibility is to refer to normal professional standards.The party undertaking the duty is required to exercise the degree of competence expected of a specialist in its field. The duty must be performed inaccordance with "accepted industry standards," in the manner of a "reasonable professional person of a normal degree of competence." At firstsight, this approach is midway between the two set out above-the generalstandards of the diligent and reasonable man and the standards of the contracting party itself. In fact what is really involved is a more precise versionof the abstract approach. The "reasonable man" here becomes the "reasonable professional man." As we said earlier, the difference is only in thedegree of precision given, since whether behavior is "reasonable" is determined by placing the "abstract" man in the same circumstances as the partyunder the duty, i.e., in his professional role.

2. Shades of Meaning

These few considerations show the main types of criteria that may beused to define the expected quality of a contracting party's obligations.Caution is required, however, when, in any particular case, the contractualterms have to be interpreted.

(a) An investigation of the actual circumstances in which a clause wasinserted in the contract can lead to different conclusions.

• It is manifestly true that some of the expressions examined aboveare not always used by the draftsmen in contracts in full knowledgeof the consequences of their choice of terminology. Negotiators donot always think twice before undertaking in "a reasonable manner." Such terms sound reassuring and inoffensive. Some of themembers of the Working Group suggested that their inclusion ina contract would appear to give it a "friendly" or "convivial" air. Insuch circumstances, it would be quite preposterous, in interpreting such a clause, to try and discover the will of the parties.


• In other cases, the choice of terminology is the result of thenegotiators' inability to agree on more precise wording toexpress the obligation undertaken. A solution is found in theadoption of supposedly vague wording (for example, "with care,""its best ..."), which, when litigation later ensues, simply postpones the difficulty. Here again, if the basis for interpreting theterm is to be the will of the parties, it will not be found by examining the meaning of the words.

• Sometimes, on the contrary, great consideration is given to thechoice of phraseology but, in the mind of one of the parties atleast, the words chosen mean something different from what onewould expect on the basis of the interpretation set out above. Thetypical case is where a "best efforts" clause is used by a spaceagency to express a purported exemption from liability.Interpretation of such situations is very delicate; it will depend onknowing whether the other party was informed that this was themeaning intended and whether that party agreed with it, and willfurther depend on principles governing interpretation in general(see below). Moreover, the validity of such an exemption clausemay be questionable.

• In another situation, wording is chosen without anything appearing to give it a meaning different from that set out above, but itrelates to a duty in the performance of which a different degreeof care is usually expected. Thus, a parent company may undertake to use its "best efforts" to ensure that its subsidiary is in aposition to meet its obligations. An interpretation based on thenature and object of this duty might lead one to attribute agreater degree of severity to this expression than the wordingactually implies. In this case, a letter of comfort, the WorkingGroup thought that the "best efforts" amounted to an undertaking to achieve a specific result by the parent company. Such interpretation is, of course, open to question.

• A given term may sometimes have a particular meaning; in one situation described above, "reasonable" has been interpreted tomean "mitigating" or "reducing" the intensity of the obligation.

• Finally it should be recalled that these various expressions areoften used in combination.

(b) On the other hand, in this area more than in any other, one mustalways bear in mind the specific features of the different legal systems andthe principles that govern the interpretation of contracts.

• There are oppositing views concerning the grounds for contractualliability. Under common law, a contractual obligation is, in theory,absolute; under civil law, liability for breach will, in principle, only


arise on the basis of fault. The various clauses studied aboverequire an examination of the conduct that has led to the disgruntlement of the party benefitting from the undertaking. Theyfit easily into the civil law structure, but under common law, inspite of the frequency with which they occur, they alter the normalsystem of liability.

• Whatever may be the general philosophy of its particular system ofliability, each legal system may have its default solutions dealingwith the degree of burden normally attached to such or such anobligation. In the absence of any qualification in the contract,rules exist everywhere (specific or based on general principles) forestablishing the liability of a contractor in the construction industry, a licensor, a party involved in launching satellites. Every qualification used in the agreement must thus be interpreted byreference to the system that would apply in its absence.

• The interpretation of contracts under certain systems of law reliesprincipally on finding the will of the parties. Particularly noteworthy in this context are Article 1156 of the French Civil Code andArticle 1362 of the Italian Civil Code. Another tendency is to givepreference to the expressed will of the parties as opposed to theiractual will. German law, in this respect, falls between these twoapproaches. Under English law, although the matter is debated lessthan on the Continent, the expressed will of the parties is paramount: a clause whose meaning is clear does not need to be interpreted in accordance to the outside elements.92 This was clearlyillustrated in two statements by English judges, already cited above:• "We think 'best endeavours' means what the words say . ..";• "1 cannot find . .. any context which satisfies me that the words "use

its best endeavours to obtain consent" could be construed otherwise than in accordance with what 1 take to be their clear; primary andnatural meaning."

These opposite approaches will clearly have a profound influenceon the interpretation of the different expressions being considered, according to the applicable law. A legal system, which givespreference to the expressed will of the parties, will give the expression concerned a more literal meaning than a system of law thatseeks to discover the actual will of the parties, beyond the languageof their agreement.

• However, in practice, it seems that the English and Americancourts do not draw a distinction between "best efforts" and "reasonable efforts," whereas a literal interpretation mightjustify different meanings similar to those suggested above.

92 Cf. also supra, pp. 89 and 105-119; K. Zweigert & H. Katz, op. cit., II, pp. 406-409;C. Del Marmol & L. Matray, L'importance et I'interpretation du contrat, Rev. Dr. Int. Dr.Corn!)., 1980, pp. 158-208.


• Several of the expressions discussed here are rarely used in certainlegal systems (for example, "best efforts" in French law, in spite ofthe extent to which the expression has in practice come to be usedin contracts), whereas they may be in common use in other legalsystems where they have been examined in case law and in theoretical commentaries (for example, "best endeavors" and "bestefforts" in English and American case law, and in American literature). The common lawyers' immoderate tendency to use the term"reasonable," which for them is really a familiar concept, is wellknown, whereas on the Continent, the term is used much lessextensively. Besides, a given formulation may prompt certainlawyers instinctively to look to distinctions peculiar to their ownlegal systems (for example, obligations to appropriate means andto achieve a specific result for lawyers trained in French law or asimilar system), whereas, a pTioTi, the words may mean nothingunder the other contracting party's legal system. Such situationsmay lead to misunderstandings: a clause that is vague or harmlessfor one party may be enormously significant for the other.

• The concept of "best efforts," in particular, has been greatlyrefined in American law, with the aid of economic analysis. Severallevels of requirements have been suggested in order to clarifY theexact meaning of the words; first, extending as far as interests ofthe party itself undertaking the obligation (the "diligence insurance" referred to above-a very restrictive interpretation); second,seeking the optimum combined level of satisfaction for both parties; and finally, requiring that the party concerned go so far as tosacrifice everything to the interests of the beneficiary of the duty(the "fiduciary duty" mentioned above).


The inclusion in a contract of a "best efforts," "reasonable efforts,""due diligence" "accepted industry standards" or similar kind of clauseshould not be taken lightly, in spite of the reassuring appearance of mostexpressions of this type. Various pieces of advice and warnings areprompted by the explanations above. The most important ones are:

1. Each of these terms, to varying degrees, acts to limit the extent ofthe duty undertaken by a given party to the contract, by comparison with an unconditional undertaking to carry out a totally satisfactory service. The interests of the beneficiary of such a duty arebetter served by a clause free of any qualification of this type.However, where complete success of an action cannot be guaranteed, the inclusion of such terminology becomes inevitable.

2. In the first place, before suggesting any wording, it is advisable toascertain the standards by which the actions of the party con-


cerned will be measured: the usual behavior of the contractingparty, how the party acts on its best days, how a professional ofaverage competence in the area concerned, or a professionalhighly qualified in that area, would act; or there again, the generalstandard of a reasonable and careful man. The terminology mustbe chosen by reference to the desired level of requirement,whereas, too often, it is only later that the meaning of an expression chosen lightly is called into question.

3. The most precisely drafted clause prevents the most difficulties. Inthis respect, a reference to professional standards seems preferableto more general references (e.g., "reasonable efforts," "due diligence," etc.). Where necessary, the level of professional competenceexpected should be stated, if there are several different levels in thefield concerned. It is often a useful technique to clarify by the use ofa few examples the type of behavior expected of the party undertaking the duty. A couple of illustrations are set out above.

4. It Is important not to lose sight of the law applicable to the contract. The impact of a clause will vary according to the system of liability applicable under that law. Moreover, certain formulationshave developed meaning under certain legal systems: negotiatorsobviously need to be aware of such meanings before selecting aclause, as seen above. The negotiators must also pay attention tothe principles that will govern the interpretation of their chosenclause if difficulties arise.

Reference to expressions of "best efforts," "due diligence," "reasonablecare" or "accepted industry standards" types, so frequent in internationalcontracts, illustrates the dilemma between the impossibility for a contracting party to undertake certain obligations in absolute terms and the needto define the degree of requirement that the performance by the partyundertaking the obligation must nevertheless fulfill. The drafting of suchclauses is a delicate matter; no formula can ensure complete security. Theabove discussion will hopefully be of assistance in drafting the most appropriate contractual provisions with more lucidity. It is then up to the negotiators to use their best efforts!

CHAPTER 5

CONFIDENTIALITY CLAUSES ININTERNATIONAL CONTRACTS

I. INTRODUCTION

King Midas, the judge of musical contest, was so imprudent as to prefer Pan's flute to Apollo's lyre. In revenge Apollo gave the King a magnificent pair of ass's ears. Midas, being ashamed, tried to hide them under hiscrown, but what should he do about his barber to whom disclosure wasunavoidable? The King made him subscribe a confidentiality clause: nothing was to be revealed about the peculiarity of the royal ears. Unable tobear the weight of such a secret, the barber dug a hole in the earth andwhispered into it what he knew, before re-filling the hole. But shortly afterwards some reeds grew at this spot that murmured to the wind: "KingMidas has the ears of an ass"! The unfortunate King, whose secret was thusdiscovered, committed suicide by drinking the blood of a bull.

In our times, confidentiality clauses and secrecy agreements are widespread. It is no longer a matter of hiding ass's ears but technical processes,commercial methods, financial information. Exclusive information has economic value that is often substantial for the person holding it. In many circumstances, however, it has to be shared. The bearer may be tempted toextract an additional benefit by disclosing it to others. He sometimes mustmake certain disclosures to third parties in order to enable them to judgethe value of a proposed operation. The specialization of work leads to thesharing of secrets with colleagues, employees, suppliers and sub-contractors. In all these cases, precautions must be taken so that the secret remainsconfined within strict limits to avoid its dilution and devaluation.

In the absence of any agreement, the law provides protection for certain confidential information. A "professional secret," which may beenforced by criminal law, exists in certain professions. Criminal law oftenalso protects industrial secrets. Civil law imposes an obligation to be discrete, with contractual or at least delictual remedies. In many countries,and particularly in common law jurisdictions, extensive case law exists onthese matters. Specific studies, made by certain members of the WorkingGroup, have been published following the original publication of this

231


study, concerning the situation in Germany, England, Belgium, the UnitedStates and Romania. I

The applicable law does not always provide sufficient protection appropriate under the circumstances of the case, and, in many instances, practitioners prepare specific confidentiality agreements that they require fromthose to whom the information is to be revealed.

The Working Group has also come across such clauses in an incidental way while studying letters of intent, best endeavors obligations andobligations surviving a contract. 2 Their frequency, their significance andtheir complexity justify that they be the subject of a separate analysis. Wepresent here the result of a study of a collection that included more than250 clauses. 3

In order to concentrate on the problem of confidentiality itself, a subject already sufficiently large, the present chapter will not consider tworelated concerns that often appear in the context of confidentiality clauses.

The first of these problems is that of the use to which confidentialinformation may be put. There is often a close connection between the

1 O. Capatina, Remarques sur les clauses de confidentialite en droit roumain descontrats intemationaux, Rev. Dr. AJ! Int., 1991, pp. 107-134; P. Ellington, Obligations ofConfidentiality-English Law, Rev. Dr. AI! Int., 1991, pp. 141-148; R. Jillson,Noncontractual Protection under American Law of Business Information, Pum. nr; AlIInt., 1991, pp. 149-152; W. Kraft, L'obligation de confidentialite en droit allemand, Rev.IJr. AJ! Int., 1991, pp. 135-140; M. Vanwijck & M.F. De Poyer, La fonction protectrice dudroit beIge en matiere d'obligations de secret et de discretion dans les relations contractuelles en I' absence de clause de confidentiali te, Rev. nr; AJl Int., 1991, pp. 95-106.Legal literature is abundant on the subject; also see, e.g., Chr. Gavalda, Le secret desaffaires, Melanges Savatier, 1965, pp. 291-316; Travaux de l'Association H. Capitant, T.XV, I"e secret et le droit, 1974; G.]. Virassamy, Les limites a I'information sur les affairesd'une entreprise, Rev. Trim. Dr; Comm., 1988, pp. 179-217; A. Kohl, Les notes internesdujuriste d'entreprise peuvent-elles beneficier de la confidentialite accordee aux membres du Barreau?, Cah. nr; EUJ:, 1989, pp. 179-223;]. Huet & F. Toubol, Violation de laconfidentialite des negociations, in Intemational Chamber of Commerce, F'orrnation ojConlrar:ls and Prewnlnu;lual Liabilily, Paris, 1990, pp. 239-257; B. Bouloc, Le secret desaffaires, Dr; PraL Comm. Inl., 1990, pp. 6-41; B. Mercadal, Mhnenlo fJTalique de Droil desajfaires, 1990, pp. 450-451; Ph. Marchandise, Confidentiality Agreement, A RealCommitment!, I.B.I"1, 2002, pp. 741-748.

2 Cf. sufJTa, Chapters 1, and 4, and ir~fra, Chapter 13.

3 On confidentiality clauses, also see Y Poullet, Le marche de l'information. Aspectscontractuels: les clauses de confidentialite, Rev. Dr. AJl Int., 1989, pp. 939-975; H.Dubout, Les engagements de confidentialite dans les operations d'acquisition d'entreprises, BullelinJoly, 1992, pp. 722-728; L. Ravillon, Les lellx;mnmunicalions flar salellileASfler:lsjuxidiques, Paris, 1997, pp. 475-480;].M. Mousseron, Technique mnlnu;luelle, Paris,2nd ed., 1999, No. 1156-1159; M. Buhler, Les clauses de confidentialite dans les contratsintemationaux, Rev. Dr. AJ! Int., 2001, pp. 359-387.

Confidentiality Clauses • 233

obligation of confidentiality and the permitted use. It certainly happensthat the information finds its way to persons who have no right to use it, forexample to an expert appointed to judge the value of a formula and toreport on it,4 but more frequently the information is provided so that itmay be used, and the confidentiality clause often contains provisions as tohow the information can be used. The two aspects are nevertheless distinct,and their effect differs upon the expiry of the contract. Normally the rightto use comes to an end at that moment, while the obligation of confidentiality continues. The contract often prohibits the continued use of theknowledge, which may form part of a non-competition clause. This question would justify its own analysis, but we shall not undertake that in thepresent study. Nevertheless, we shall return to this parallel relationshipbetween confidentiality and non-use when we examine the validity ofsecrecy clauses.5

The second question is that of the ownership of the information.Draftsmen sometimes choose to place within a confidentiality clause a declaration that the revelation of information to one's partner in no wayimplies the transfer of any right-other than that of temporary use-to thatinformation. This phenomenon occurs frequently in agreements reachedduring the preliminary negotiations to licence contracts. Despite the insertion of such provisions in undertakings of confidentiality, the subjectappears at a different level and we shall not concern ourselves with it.

A study of aspects of practice, with detailed analysis of confidentialityclauses in their different elements (Section II), will be followed by a seriesof general remarks and critical observations (Section III) before offeringadvice to negotiators (Section IV).

II. PRACTICE

A. General Remarks

Confidentiality undertakings come in various forms. They appear mostfrequently in certain types of contracts. They are often established at thenegotiating stage, to appear again in the contract itself, which they frequently survive. The obligations created are unilateral, bilateral or parallel.These different aspects will now be examined in turn.

1. Form of Confidentiality Undertakings

(a) Confidentiality undertakings sometimes take the form of clausesinserted in contracts and sometimes become distinct contracts.

1 Cf. infra, pp. 294-295.

5 Cf. infra, pp. 291-293.


Recourse to a specific agreement is particularly frequent in two sets ofcircumstances. At times, parties undertake negotiations prior to anintended future agreement, relating, for example, to the transfer of technology or the acquisition of shares. Information must be provided in orderto permit one's partner to judge the value of the proposed transaction.Since, at this stage, no contract exists yet, it is natural to envisage a specificconfidentiality commitment. Or, a party receives contractually confidentialdata, with permission to transmit it to others who will participate in theirimplementation, for example, employees or sub-contractors; the clause inthe contract imposes a requirement to obtain a specific undertaking tosecrecy by the third parties receiving the information.

Nothing, however, is clear-cut. It happens, too, that negotiators provideconfidentiality obligations in the form of clauses contained within a preliminary agreement with a broader object, such as a letter of intent. (1

Secrecy obligations from employees are sometimes set out in their employment contracts.7 Conversely, between parties to an agreement, the confidentiality of certain information may be judged so important as to give riseto an ancillary contract separate from the main contract.

(b) Whether it concerns a clause in a contract or a specific agreement,the length of confidentiality obligations is extremely variable. At oneextreme, there is the simple note "confidential" placed on the document;at the other, the agreement is a dozen pages long. The majority of clausesare quite elaborateS; a minimum of several lines is necessary if one wants tocover, even briefly, the various aspects: the subject matter of the confidentiality, the exceptions to secrecy as to information and persons, the intensity of the obligation, its duration and the possible remedies. Not all theclauses in the sample are beyond criticism, far from it, but it is noticeablethat the confidentiality provisions are often more carefully crafted thanother clauses of the contract.

2. Types of Contract

Confidentiality undertakings are to be found in a great variety of contractual (or pre-contractual) situationsY

6 See an example supra, Chapter 1, pp. 25-26 and 46.

7 Cf. infra, pp. 289-291.

R Concerning the usual length of confidentiality clauses, d. J. Jehl, Le cormnerce international de la technologie, 1985, p. 167.

') Cf. G. Hertig, Transfer of Technology Agreements: the Pharmaceutical IndustryExample, in International Chamber of Commerce, Formalion of Conlnu:ls and Precontractual Liability, Paris, 1990, pp. 215-236.


First, they appear in contracts (or during the negotiation of contracts)concerning the research for or the transfer of technical information:research contracts,lO know-howll and consultancy contracts,12 technicalassistance agreements, etc. This technical information is itself the valuewith which the contract is concerned, and it is necessary to protect it. If theinformation has been the subject of a patent, then it will have been published and its protection is achieved by an action against infringement; confidentiality clauses are then not relevant. But it is different when there isnot, or not yet, a patent or when there is information surrounding a patentand necessary to put it to use. In such situations, the best protection is tokeep the secrecy surrounding that information intact. If the secret needsto be shared with another party, it is necessary to oblige that party to keepto itself what has been revealed.

Various standard contracts or practical guides prepared by international organizations confirm the significance of confidentiality agreementsin transfers of technology. Clauses on the subject appear in model contractsprepared by Orgalime on the subject of transfer of technology (Article30).13 Secrecy clauses are the subject of commentaries and advice in various guides prepared for international negotiators, in particular the "Guidefor Drawing Contracts on International Transfer of Know-How in theMechanical Industry" of the Economic and Social Council of the UnitedNations,14 and the "Guide for Drawing Up an International DevelopmentContract" prepared by Orgalime. 15

Another substantial group of situations in which confidentiality undertakings flourish is that of the re-grouping of companies, acquisition ofminority interests, takeovers, mergers,joint ventures, etc. To varying extent,these transactions lead to the revelation of a large quantity of financial,commercial and technical information to the other negotiating partner

10 Cf. Cl. Renard, Les contrats de recherches, in Commission Droit et Vie desMfaires de I'Universite de Liege, Aspects furidiques de la recherche scientijique, 1965, pp. 39and 55; P. Demaret, Analyse de quelques contrats de recherche, in AspectsJuridiques . .. ,id., pp. 67-68; M. Dubisson, Les accords de coofJeralion dans le cornrnen:e inlernalional, 1989,pp. 194-195.

11 Cf.J.M. Deleuze, Le contrat international de licence de know-how, 4th ed., 1988, especially pp. 34-41, 75-78, 89, 93.

12 Cf. A. Hubert, Le conlral d'inglmierie-conseil, 2nd ed., 1984, especially pp. 135,245-248.

13 Orgalime, Model International ContractJor the transfer oJtechnologJ, EU/EEA version,June, 1997 and International technology license agreement outside Ul;JHHA, September, 1999.

14 Doc. TRADE/222/Rev. 1; E.70.ILE.15, 1970.

15 Orgalime, Guide for Drawing Up an International Development Contract, September,1999, pp. 41-43; this guide provides model secrecy clauses.


that one cannot allow to be communicated to third parties. Thus the"Guide for Drawing up International Contracts Between Parties Associatedfor the Purpose of Executing a Specific Project" drawn up by the U.N.Economic Commission for Europe, contains several recommendations onthe subject.)(j Frequently, when such a commitment is made during thenegotiations, it also influences the very existence of the negotiations.

The practice of data-rooms leads to a sort of institutionalization of confidentiality undertakings in the corporate market. When a company is forsale, possible purchasers may be invited to find the necessary informationby visiting a closed room where all the data useful for evaluation have beengathered. Access to the room is subject to the prior signing of a confidentiality undertaking. 17

Confidentiality clauses are also common in contracts for the provisionof computer equipment, concerning both the specific software to be developed and the information about the enterprise revealed for the development of such software. IS Another important sector is that of contracts forthe construction, the launching and the use of communication satellites. 19

In a very different context, providing a publisher with certain information with a view to a possible publication can be accompanied by a confidentiality pledge. A French tribunal dealt with a case in which a periodicalhad published excerpts from a manuscript concerning Princess Diana inspite of the fact that the contract had not been concluded, and a secrecyclause had been agreed upon.20

Certain contracts intrinsically have less need for a duty of discretion.Contracts for the sale of goods, for the leasing of a building, for jobbing orfor construction hardly present confidentiality aspects. But it can be different depending on the object of such contracts. A sale may relate to military arms or strategic material. A proposed construction may incorporateadvanced technology. In such cases confidentiality clauses appear in theagreement between the parties. Thus, the new FIDIC contracts put restric-

16 Doc. ECE/TRADE/131, No. 69, 1979.

17 On the practice of data morns, cf. Ph. Marchandise, La libre negociation-Droitset obligations des negociateurs, in l"e droit des affaires en evolution, Brussels and Antwerp,1998, pp. 6-7.

IS Cf. Y Poullet, Le marche de !'information. Aspects contractuels: les clauses deconfidentialite, Rev. Dr. AJI Int., 1989, pp. 939-975.

19 Cf. L. Ravillon, Les telecommunications fJar satellite-AsfJer;tsjuridiques, Paris, Litec,1997, pp. 475-480.

20 Paris, February 14, 1997, JUJ: Class. Per., ed. gen., January 7, 1998, 25, note B.FAGES.


tions on the communication to third parties concerning documents prepared by the contractor. 21 The "Legal Guide on Drawing up InternationalContracts for Construction of Industrial Works" prepared by UNCITRALalso contains a section covering the confidentiality of the know-how provided (No. 23-25).22

Similarly a distribution contract may contain secrecy undertakings if itinvolves the transfer of sensitive information about the clientele, the market or the marketing processes, etc. A confidentiality clause appears in themodel Exclusive International Agency Contract prepared by Orgalime(Article 8) .23

In other sectors, the law or professional codes of conduct impose, inprinciple, secrecy obligations. This situation explains the absence or at leastthe rarity of confidentiality clauses in certain contracts. One does notrequire such an undertaking from the bank, from which one is seeking aline of credit, any more than one does from a doctor or a solicitor.Situations do arise, however, where an express confidentiality clause is usedto duplicate and no doubt reinforce a pre-existing legal obligation. Thus,despite the rules, which, in many countries, oblige employees and exemployees to respect the business secrets of an enterprise, it is not rare thatemployment contracts include a confidentiality clause and even that specific obligations are subsequently imposed on certain members of staff.

Confidentiality obligations are also found in the context of contractsthat are subsidiary to a principal operation that is itself the subject ofsecrecy. Thus, suppliers, sub-contractors, intermediaries and advisers findthemselves subjected to a secrecy obligation concerning data to which theyhave access during their participation in an operation.

The most original document found by the Group was a form issued bya public works authority, inviting tenderers to list, in great detail, confidentially, the various bribes they paid throughout the whole procedure.

3. Stages in the Ufe of the Contract

Confidentiality obligations appear at various stages in the life of a contract. Frequently such undertakings are created at the start of negotia-

21 FIDIC, Conditions ofContractfoT Construction, 1st eel., 1999, Art. 1.10 al. 3; Conditionsof Contract fOT Plant and Design-Build, 1st ed., 1999, Art. 1.10 al. 3; Conditions of Contract fOTEPC Turnkey Pmjer;ls, 1st ed., 1999, Art. 1.10 al. 3.

22 Doc. A/C.N. 9/SER. B/2; E. 87.V.10, 1988.

23 Orgalime, Agency Contract-International Agency on an Hxclusive Basis, February1990, reprint with amendments,june 1999.


tions,24 during which it may be necessary to reveal data. It is important toprotect those, especially if the negotiations should fai1. 25 The situation isdelicate, even more so if the negotiation involves the transfer of technology. One must reveal enough to motivate the other party to reach agreement, but if too much is said there is a risk that the latter may benefit fromthe information without being obliged to reach an agreement! One musttherefore protect oneself by requiring the other party to enter in advanceinto an undertaking for confidentiality and non-usage. A first group ofagreements and clauses therefore appears at this point.

If a contract is entered into, it will contain a confidentiality clause, andspecific agreements on the same subject may be added, in particular withemployees or other persons who will be associated with the performanceof the contract.

Many confidentiality obligations also cover a definite or indefiniteperiod subsequent to the expiry of the contract. In such cases, they provideprotection against the revelation of the secret data after the end of the contractual relationship. We will return to this in more detail when analyzingthe clauses.26

4. Unilateral, Reciprocal or Parallel Obligations

An obligation of confidentiality is often solely imposed on one party,namely the one that receives the information, but it is not unusual for thecontract to provide reciprocal obligations where there is a mutual exchangeof data. 27 Sometimes the obligations are parallel, in the sense that eachparty promises to keep the same information secret. Thus, an inventor maydeliver his discovery to a company that is to use it; they will both pledge notto divulge it to third parties. A parent company may instruct a merchantbank to find a purchaser for one of its subsidiaries. It would provide thebank with a certain quantity of confidential information about this subsidiary with an obligation to confidentiality. In a parallel way, in order toassure itself of the exclusivity of its instructions, the bank would obtainfrom the parent company a promise that it will not reveal the informationin question to anyone else.

21 Cf. the studies cited supra, of G. Hertig and ofJ. Huet & F. Toubol, as well as O.Capatina, op. cit., No.5.

25 The finn which will provide information must also protect itself against overlygenerous disclosures by its representatives, a fortiori against "leaks" encouraged by corruption (cf. G. Hertig, op. cit., pp. 224-225).

26 Cf. infra, p. 280.

27 Cf. on this O. Capatina, op. cit., No.3.


B. Systematic Analysis of Confidentiality Clauses

A well-drafted confidentiality clause deals with a series of questions. Inthe first place, it must define its subject matter, i.e., the data that are to beprotected. Exceptions are necessary, however, e.g., for the situation wherethe knowledge envisaged is part of or may enter public domain. The secretinformation must often be shared in order to be of benefit; it is necessaryto specifY with whom (members of staff, certain co-contracting parties andso on) and under what conditions. An obligation may be characterized byits intensity; the clause may seek to express the degree of diligencerequired on the part of the person holding the confidential information.The secrecy undertaking will often specifY the period of its duration, sometimes surviving the contract itself. Finally, difficult as it may be, it is advisable to specify in the clause appropriate sanctions in case of breach.

Such various aspects will be considered systematically by analyzing the200 or so clauses that have been compiled taking into account the discussions that took place in the Working Group.

1. The Subject Matter of the Confidentiality

A confidentiality clause must start by defining its subject matter, that isto say the information that is to be kept secret. 28

(a) Some examples are not very elaborate;

• ''You should hold secret all know-how and other confidential information disclosed to you by the Company or its employees."

• "The term 'confidential information' shall mean all informationdisclosed under this agreement except ..."

• "... tous les secrets d'affaires et de fabrication des autres members ..."• "Le contractant est tenu d'observer la plus grande discretion en ce

qui concerne les informations qui viendraient a sa connaissancedans les contacts avec l'institution ou dans l'accomplissement destaches decoulant du present contrat et qui ne seraient pas encorerendues publiques."

• "All information which is of a confidential nature which eitherderives from either party to the Agreement under the provisionshereof or arises in connection with the performance of thisAgreement or the conduct of the business of the joint venture ...

28 On this matter, also see G. Hertig, 0fl. cit., p. 219;]. Huet & F. Toubol, 0fl. cil., No.23-28; O. Capatina, 0fl. cit., No.6.


or acquired by employees of either from observation of machines,processes and activities in the facilities of the other ..."

As for the origin of the information, the first two examples cite information "revealed" by the other party. This may be too narrow; certain information is transmitted without any positive act from its original holder bythe very fact of the relations created between the parties. In this respect,the three other clauses are preferable.

In another approach, the second example defines the confidentialinformation by reference to specified exceptions (to which we will returnlater); similarly, the fourth example excludes information which hasbecome public.

(b) It is often preferable to be more specific and to state which typesof information are concerned.

1. The clause may provide that it is concerned with technical data communicated in the context of the contract, either in general terms or by reference to certain provisions in the agreement:

• "... all unpublished and novel technical information given to theLicensee under the provisions of this agreement not previouslyknown to Licensee."

• "... any information concerning the other party's plant includingtechniques, processes, products, equipment or operations whichmay come within the knowledge of a party in the performance ofor in connection with this Agreement."

• "'Information' as used herein shall mean design information,process flow diagrams, capital and operating cost data, and otherinformation and data that may be owned by B ... relating to theplanning, design, construction, cost, preparation for start up,operation or maintenance of any of the processes and facilities ofthe plant."

• "... any and all (i) Information, know-how and data, technical ornon technical, in any way relating to the subject matter of this agreement or to any process used or product or apparatus manufactured,used or sold by Buyer, which is disclosed to Seller by or on behalf ofBuyer before, during or after the term of this agreement; (ii)Engineering data as defined in and covered by Article 11; and (iii)Subject Developments as defined in and cover Article II."

The following clause inserts a list by way of an attempted definition:

"Par secrets d'affaires et de fabrication, il y a lieu d'entendre toutesaffaires (procedes, techniques, themes et contrats d'etudes en


cours, contrats de recherche) qui sont atenir au secret de par leurnature et dont la transmission ades tierces personnes ... seraitpn§judiciable ax ou aux societes liees par contrat aX."

The formula is not a very happy one. The first criterion is tautologousand the second opens the door to much debate. It is preferable to providea more objective specification of the confidential technical information.

An undertaking given during the negotiation of a contract for thetransfer of technology may provide for initial confidential information forthe purpose of evaluation and then stipulate that in any event the resultsof this evaluation are to remain confidential:

"... All Results will be considered as Confidential Information."

2. Depending on the nature of the contract, data other than technicaldata can also be the subject of a confidentiality clause, e.g., information ofa commercial or financial nature:

• " any information relating to the business of the other ..."• precios, estimativos, ofertas 0 cotizaciones respectos a la total-

idad 0 parte de los trabajos materia del presente acuerdo ..."• "... aIle den Verhandlungspartner und das Verhandlungssystem

betreffenden Daten und Informationen ..."• "... information ... about Companies' manufacturing processes

and services, including information related to research and development, purchasing, accounting, engineering, manufacturing,marketing, merchandising and selling."

• "... any and all information ... which relates to ... , and mayinclude, for example without limitations, data, know how, formulae, processes, designs, sketches, photographs, plans, drawings,specifications, samples, reports, price lists, vendor lists, studies,findings, inventions or ideas."

• "... all data, reports, interpretations, forecasts and records containing or otherwise reflecting information concerning any part of... the Business which you ... may provide to us in the course ofour evaluation of the possible acquisition described above ..."

The following clause extends the application of confidentiality to datarelating to third party enterprises:

"... any information relating to the business affairs or finances ofthe other or of any member of the other's group or of any suppliers, agents, distributors, licensees or customers of the other whereknowledge of the sale was received during the period of thisAgreement."


Here, too, certain of the clauses only place the information under theseal of secrecy if they are "secret," which risks giving rise to problems ofinterpretation. One notes certainly that the confidentiality may attach totypes of data as enumerated, but one still needs to determine among thosedata which of them are secret and which are not:

• "... any secret or confidential business or marketing plans orstrategies of ..."

• "... all technical and commercial information including but notlimited to computer software, drawings, design, improvements,developments, additions, operational analyses, financial and marketing information and know how communicated by the parties toeach other during the subsistence hereof, and which constitutes atrade secret or other confidential or proprietary information ..."

• "... information, not generally known, about the Company's business, processes, products and customers, including, but not limitedto, information relating to methods of manufacturing and processing Company products, inventions, purchasing, accounting, pricing,customers and lists, marketing, merchandising and selling ..."

• "... any secret or confidential information whatsoever regardingthe operation finances, business, products, processes, techniques,know how, suppliers, customers, dealings, transactions or otheraffairs of the Company or any of the subsidiaries or any of its ortheir suppliers or customers ..."

Here is a clause that appears to consider confidential by nature information of a financial or commercial character, in contrast to informationof any other type. It is taken from a contract relating to the commercialexploitation of a retail shop:

"... any trade secrets; confidential knowledge or information or anyfinancial or trading information of or relating to the store of ..."

3. Confidentiality may be extended to the documents created by therecipient of the information himself when they reflect that information:

"... analyses, compilations, studies or other documents or records prepared by you ... to the extent that such analyses, compilations, studies,documents or records contain or otherwise reflect or are generated fromsuch information ..."

4. Sometimes it is the very existence of the contract, or its content,which must be kept confidential.

• "I will not disclose to any third party in any manner whatsoever thefact or nature of my association with A ..."


• "The provisions of the present Agrement may not be disclosed tothird parties."

• "The Vendors shall not ... make any announcement regarding theexistence or subject matter of this Agreement without the priorwritten consent of the Purchaser."

• "The Parties shall agree upon arrangements for prior reviews andconsultations with respect to publicity releases or advertisingregarding the Contract, this Consortium Agreement or the Workbeing performed. "29

It may be negotiations themselves that are to be covered by secrecy:

• "Both parties shall use all reasonable efforts to maintain in confidencethe fact that Recipient and ... have entered into discussions ..."

• "'Information' means ... (ii) the fact that discussions and negotiationsare taking place concerning any possible transaction with us ..."

• ''You will not ... disclose to any person either the fact that discussions or negotiations are taking place concerning a possible transaction between the Company and you or any of the terms,conditions or other facts with respect to any such possible transaction, including the status thereof."

• "You will not make any public announcement with respect toany ... proposed transaction between the Company ... and you."

• "Such undertaking also applies to the fact that discussions are taking place in respect of the PURPOSE. In particular, any pressrelease relating to such discussions or to any subsequent arrangement has to be agreed in advance by both parties."

• "Nous nous engageons ... a ne pas divulguer Ie fait que lesInformations aient ete mises anotre disposition, que des negociations relatives a l'Operation soient en cours avec ... ou que cesnegociations aient ete suspendues ou interrompues."

We will return later to the possible illegality that may attach to a confidentiality agreement covering the very existence of a contract. 3D

5. The following clauses define as confidential the very fact that one ofthe parties uses or does not use confidential data, information which mightprove to be valuable to competitors.

29 Cf. also the clause in the famous "Memorandum of Agreement" executed onJanuary 2, 1984 between Gordon P. Getty, the Getty Museum and the Pennzoil Company,according to which "The Trustees and Pennzoil (and the Company upon approval of thePlan) will coordinate any press releases and public announcements concerning the Planand any transactions contemplated hereby." On this case, d. supra, pp. 41-42, as well U.Draetta, The Pennzoil Case and the Binding Effect of Letters of Intent in theInternational Trade Practice, Rev. Dr. AI! Int., 1988, pp. 152-172.

30 Cf. infra, pp. 291-293.


• "Seller shall in no event disclose that any Confidential Informationis or is not being utilised by Buyer."

• "The very fact that we use such information for the manufactureof ... shall be regarded by you as a trade secret and as a confidential disclosure."31

6. Sometimes it is the source of information that must be kept confidential even after the data themselves have lost their need of secrecy:

"The Recipient shall not disclose ... the fact that such ProprietaryInformation was furnished to the Recipient by the company ororiginated with the company and any correlation or identity whichmay exist between the Proprietary Information and any otherinformation now or hereafter made available to the Recipient."

7. In certain cases the contract limits the character of confidentiality toinformation expreSSly described as such: 32

"Each party shall ... maintain confidential ... information disclosed to it by the other party in data sheets and reports pursuantto Articles 2 and 5 hereof and in any other writings designated asconfidential by the disclosing party ..."

Very frequently, such clauses distinguish between information disclosedin writing and that which, initially, was only oral:

"Confidential Information' means all information, data and material ... which when disclosed are marked 'Confidential' or'Proprietary,' or, when disclosed orally, are clearly identified as'Confidential' or 'Proprietary.'"

In this last case, the confidentiality must often be confirmed in writingwithin a certain time:

• "... all related communications and observations written or (iforal) reduced to writing and so identified within a reasonable timeafter oral disclosure ..."

31 Y Poullet, op. cit., p. 964, points out the interest third parties could have in knowing the questions a firm puts to a data bank, which can reveal ongoing research, as wellas present or future commercial initiatives.

32 On such practice, also see G. Hertig, op. cit., p. 222; J. Huet & F. Toubol, op. cit.,No. 24 et 26. In the case of a visit to a data roorn, definition of the scope of confidentialinformation can be facilitated by a simple reference to all the data gathered in the closedroom.


• "Each party will keep confidential any and all information communicated by the other party under this agreement providedsaid information is in written or tangible form and designatedclearly as confidential, or if both the information and its confidential nature are confirmed in writing within 45 days in case oforal disclosure."

• "The Parties agree that Information may be disclosed either orallyor in writing. When disclosed in writing, the Information will beidentified and labelled as Confidential. When disclosed orally, suchinformation will first be identified as confidential at the time oforal disclosure, with subsequent confirmation in writing withinthirty (30) days after such disclosure referencing the date andspecifically identifYing the Information orally disclosed. Each partyagrees to clearly label as 'Confidential' all information reduced towriting by either party as a result of such oral disclosures. Eachparty agrees upon written request to provide a signed, datedreceipt which itemizes the information transmitted to the otherunder the terms of this Agreement."

This method risks provoking litigation in the event of indiscretion committed between the disclosure and the notification.

The possible variations are numerous and some of them invite comment. Thus, the following clause appears to authorize such indiscretions:

"Information disclosed orally will be considered as non-confidential unless within thirty days after such oral disclosure, a written disclosure is submitted to you containing the information which wasorally disclosed."

Another clause, to the contrary, reduces the effect of the writtenconfirmation:

''Y data should be clearly identified as proprietary or confidentialor if verbally transmitted as confidential provided always that suchconfidentiality is restated in writing by Y within two weeks after verbal communication by Y to X, but failure to make such identification or restatement will not affect the confidentiality of the Y data."

Here it is the failure to mark a document "confidential" that may, incertain circumstances, be made good within a reasonable time:

"Either Party, by affixing an appropriate legend, may identify anyother documented information furnished by it to the other Partyas the confidential or proprietary information of the furnishingParty or of its sub-contractors. In the event that any such informa-


tion is not marked as required herein and such failure to mark isdiscovered within a reasonable time and before use by the receiving Party which would be inconsistent with the provisions of thisAgreement, the furnishing Party may notify the receiving Party ofthe material to be so marked and it shall be subject to the provisions of this Agreement."

The subsequent notification of the confidential character of information provided orally can give rise to abusive extensions of the obligation ofconfidentiality, since such a notification is given unilaterally. This was thecase in several of the examples above, and the danger appears particularlyin the following clause:

"To facilitate administration of this Agreement, it is agreed that following any oral discussion between you and ourselves of suchConfidential information, we will prepare a written summary ofsuch oral discussions and provide you with a copy thereof. Suchwritten summaries, together with manuals, flow-sheets, drawings,specifications, designs and similar written data furnished to you byus shall be accepted by the parties as the total record of theConfidential information disclosed by us in confidence ..."

This clause is difficult to understand, for the secrecy clause from whichit is taken33 provides earlier that the information is given in confidence:

"all technical information disclosed ... to you."

The cumulative use of these two different approaches to the identification of the extent of the secrecy leads to a certain contradiction. Theclause quoted first, in spite of its arbitrary character, is ultimately morerestrictive that the wording that preceded it.

Another system envisages written notice in advance (or at the latestsimultaneously) as to the confidential character of that which is about tobe revealed orally:

• "X shall, prior to revealing anyone or more items of proprietaryinformation to any representative ofY, give written notice to suchrepresentative identifying either specifically or by class or groupsuch one or more items as proprietary information ..."

• "All and any information that is to be treated as confidential shallbe so labelled in writing, in the case of reports and other documents, on the face thereof, and in the case of oral disclosures, in

33 The full agreement can be found inJ-M. Deleuze, op. cit., pp. 135-136.


the form of a specific notification to the recipient made prior to orcontemporaneous to the disclosure."

This method permits one to make ab initio the reservations necessaryif one wishes to avoid falling into what may be the trap of confidentiality,even to refuse to take note of certain information in order to keep one'sfreedom of action. 31

The express and specific indication of the confidential character of certain material is intended to create greater clarity as to the field of application of the secrecy obligation. This advantage appears weakened in theevent of use of a clause such as the following:

"Each of the Parties agrees to keep confidential all informationmarked confidential and which, by its very nature, can reasonablybe taken to be confidential received from another Party."

If such a clause is used, the annotation "confidential" does not sufficein itself; it is still necessary that the information satisfy the conditionsexpressed in the second part of the clause. Such drafting is to be avoided.35

8. The definition of the subject matter of the confidentiality by meansof lists of types of data or by marking the documents implies, on the otherhand, that other information is not within the secrecy obligation. One mustbe very careful when adopting such delimitations. 36

There is a risk of abusing the "confidential" marking by placing it ontoo many documents, to the point of turning into a boilerplate provision,the effectiveness of which is very much weakened.

2. Exceptions Made as to Types of Information

Having decided what information is, in principle, the subject of theobligation of confidentiality, the clauses seek to limit the protection provided by creating various exceptions as to the knowledge targeted. Certain

31 It happens that a negotiator initially declares that any information that will begiven to him or his representatives will be considered as non-confidential, and that itdoes not wish to receive confidential information (F. Stari, FOTschungs- undHntwicklungs1JeTtTiige, Thesis, Ziirich, 1979, p. 163, cited by G. Hertig, op. cit., p. 224 andnote 25). This method is probably reserved to firms with a strong bargaining power,unless the negotiation normally concerns only information in the public domain.

35 In another interpretation, this clause presumes to be confidential, all informationlabeled as such, subject to proof to the contrary according to the criteria stated in thesecond part of the clause. If such was the intention of the drafters, the language usedis hardly satisfactory.

36 Cf.]. Huet & F. Toubol, op. cit., No. 26-28.


types of information, which come within the given definition (e.g., technical, commercial, financial, etc., data), are not to be subject to the secrecyobligation. 37

There are three classic categories of such exceptions.

(a) Firstly, no confidentiality obligation applies to information receivedthat is already in the public domain.

"Seller's obligations under paragraph (a) above shall not apply toconfidential information that is ... known to the public."

The exception is frequently extended to information which subsequently falls into the public domain:

• "... unless and to the extent such information is or later becomesgenerally available to the public."

• "... information which was at the time of disclosure in the publicdomain or after such disclosure ... becomes a part of the publicdOInain ..."

• "... (a) technology which at the time of disclosure ... is in thepublic domain ... (b) technology which after disclosure ...becomes part of the public domain ..."

The presence of information in the public domain can be demonstrated from a publication or from other circumstances, and certain clausesdeal with this aspect:

• "... so long as it remains unpublished or not generally available tothe public."

• "... which is or becomes generally known to the public throughpublication or falls into the public domain or is available fromobserving a public demonstration or use thereof."

• "... information ... which is disclosed in any patent applicationlaid open or otherwise exposed to the public ..."

• "... unless such disclosure occurs by its use in the Products manufactured by either party or by the sale of such Products."

It may be useful to try to specify what is meant by "enters the publicdomain."38 First of all, the concept requires sufficiently extensive public

37 On this aspect, also see J. Huet & F. Toubol, op. cit., No. 27-28; J. Jehl, op. cit., p.168; O. Capatina, op. cit., No.6.

38 Comparison may be made with the notions of "disclosure" and "availability to thepublic" used in patent law about the requirement of novelty and the establishment of apossible priority (cf. J.M. Mousseron, 'Praite des brevets, 1988, pp. 248-285).


knowledge. It is not sufficient that scientific information is in the possession of a few specialists; it should be "common knowledge" in the field, asexpressed in the following clauses:

• "... any information which is or becomes generally available to thepublic in printed publications of general circulation."

• "It is understood and agreed that any information known only toa few people to whom it might be of commercial interest and notgenerally available to the public cannot be deemed to be in thepublic domain."

One may require that the exception be limited to knowledge generallyavailable in the country concerned. Confidentiality would remain applicable to information that might be available elsewhere in the world:

... information which prior to our receipt thereof ... is publishedin the United Kingdom or is otherwise in the public domain in theUnited Kingdom."

The examples that follow also seek to restrict the extent of the publicdomain exception in order to avoid certain problems of interpretation.

• ''Y agrees that any information which is specific to process conditions or features or to any combination of process steps utilised inthe Plant shall not be deemed to be a part of the public knowledge... by virtue of the fact that it may be contained within broad disclosures which are part of the public knowledge ..."

• "Les 'informations' communiquees par l'une des parties ne serontpas considerees comme disponibles ou publiees ... par Ie simplefait qu'elles peuvent etre tirees d'une combinaison de publicationsgeneralement disponibles ou publiees ..."

• "It is understood and agreed that a combination of two or moreportions of the Proprietary Information is not to be deemed to bewithin the public domain merely because each portion separatelyis available to the public."

Not all cases where the information has entered the public domainlift the obligation of confidentiality. It is still necessary that this publicknowledge did not result from some wrongdoing on the promissor's part.This requirement is very frequently expressed, even though it may appearsuperfluous:

• "... except to the extent such data and information are in or hereafter come within the public domain without fault on the part ofthe Seller."


• "... technology which becomes part of the public domain, exceptby breach of this agreement ..."

• "... information which ... becomes generally available to the public other than as a result of disclosure by you or your directors, officers, employees, agents or advisors ..."

• "... it becomes published or otherwise available to the publicthrough sources other than Smith, any subsidiary or affiliate ofSmith, or any distributor of such subsidiary or affiliate."

(b) Also frequently excluded from the obligation of confidentiality isinformation that was already in the possession of the contracting party.This exception is not to be confused with the preceding one. The contracting party might already hold information that is otherwise exclusiveor little known.

• "Any information communicated in confidence under thisAgreement by either party shall be treated by the other party asconfidential, unless ... such information was in the Licensee's possession at the date of its receipt from the Licensor."

• "Si toutefois les donnees ... sont deja en possession de l'Universite... l'Universite ne sera pas tenue de les considerer comme etantde caractere confidentiel."

• "The foregoing limitations ... shall not apply ... if the ReceivingParty has rights to the information under any other agreementrelating thereto ..."

The exception may be extended to knowledge already in the possession of other companies in the group:

"Les obligations ... ne s'etendent pas aux informations qui etaientdeja en la possession de la partie receptrice et de ses societesapparentees ..."

Some clauses extend the exception to knowledge discovered by useof its own resources by the beneficiary subsequent to the transfer of theinformation:

• "aux informations qui sont developpees independamment par lapartie receptrice ou par ses societes apparentees ..."

• "... if such information was known to either party prior to suchdisclosure or is independently developed by either party subsequent to such disclosure ..."

One will notice the difficulties to which such clauses can give rise. Canone imagine that a party in receipt of confidential information "rediscovers" them "independently"?


The next variation is interesting; it assimilates the exception for priorknowledge to that of the public domain:

"The foregoing limitations shall not apply if the information is orbecomes available to the receiving Party by inspection or analysisof products available in the market."

It may be useful to specify that the benefit of the exception assumesthat the prior knowledge does not originate from the co-contracting partynor from a related company, nor that it is itself the result of a breach ofsecrecy.

• "... data which ... were not acquired directly or indirectly fromW or any of its affiliates or licensees and which you can show werein your possession prior to the time of the disclosure to you."

• "... information which the receiving Member can show was in itspossession prior to disclosure and which was not acquired directlyor indirectly from any other Member."

• "... except insofar such information ... was in the possession of aparty prior to the disclosure to it by the other party and such information was not covered by a secrecy obligation ..."

• "... information which ... is already in your possession, providedthat such information is not known to you to be subject to anotherconfidentiality agreement with or other obligation of secrecy to theCompany or another party ..."

A party invoking the exception for prior knowledge IS sometimesbound to give prompt notice to his contracting partner.

"The obligations of Article 28 hereof shall not apply to any information when, if and to the extent ... the party receiving suchinformation promptly advises the disclosing party that it possessedsuch information prior to the disclosure thereof."

Such response may, in particular, arise after the notification that particular information is to be treated as confidential, in accordance with theprocedures described above.

What is crucial to the application of this exception is that there beproof of prior knowledge. It is clearly not sufficient merely to affirm thatthe information received was already known so as to be relieved from theobligation of confidentiality. The affirmation must be justified.

• "Cet engagement ne s'applique toutefois pas aux informationsdont vous pourriez montrer ... qu'elles etaient ... en votre possession prealablement a leur communication par notre Societe."


• "... when it can be shown that the information was kept in writtenform in the files of the Receiving Party before it was transmitted bythe other Party."

• "... said term shall not include information what was either in thepossession of the Licensee at the date of receipt from Licensor asevidenced by the Licensee's written records, or can be shown bythe Licensee to have been independently developed ..."

A technique that is sometimes employed, on entering into negotiationswhere information may be transmitted confidentially, is to deposit with anotary public or other independent third party a precise inventory of theknowledge one already has. 39

(c) Also frequently excluded from the secrecy obligation is informationobtained from a third party not being itself under an obligation of confidentiality as regards the promissee, or at least not having obtained it fromthe promissee.

• "I understand that the foregoing restrictions do not apply to information ... which I acquire from others not under an obligation ofsecrecy to A."

• "... the information which Receiving Party can show that wasreceived by it after disclosure hereunder from a third party whichto the best of the knowledge of the Receiving Party was not directlyor indirectly derived from the Supplying Party."

Some clauses refuse to make an exception for information receivedfrom a third party in breach of secrecy obligations with regard to other persons, or, more generally, unlawfully.

• "... information which ... becomes available to you on a non-confidential basis from a source other than the Company or its advisors, provided that such source is not known to you to be boundby a confidentiality agreement with or other obligations of secrecyto the Company or another party ..."

• "... information which ... was within your possession prior to itsbeing furnished to you by the Company, provided that the sourceof such information was not known to you to be bound by a confidentiality agreement with the Company or to be otherwise prohibited from transmitting the information to you by a contractual,legal or fiduciary obligation."

• "Le present engagement ne s'appliquera pas aux informationsdont vous pourriez etablir ... qu'elles vous ont ete communiquees

39 This technique is also mentioned by G. Hertig, Of). cit., p. 222; d. the precautionssuggested by J-M. Deleuze, Of). cit., pp. 39-40.


ulterieurement par un tiers pouvant Ie faire Iicitement et sansrestriction quant al'usage ou au caractere confidentiel des ditesinformations. "

Furthermore the exception is commonly limited to the case where thedisclosure is made by a third party to the promissor on a non-confidentialbasis.

"... except insofar such information ... is received from third parties without restrictions on use or disclosure to others, providedthat the third party does not have an obligation of secrecy or is notin breach of such secrecy obligation."

This feature is indeed present on its own in the following clause, whichfails to insist that the third party not be itself under obligation of confidentiality.

"The obligations of this Part V shall not apply to any information ...subsequently obtained from a third party on a non-eonfidential basis."

Some other provisions are, on the other hand, most meticulous.

"... information acquired on an unrestricted basis from any thirdparty provided that the acquiring party does not know or have reason to know or is not informed subsequent to disclosure by suchthird party and prior to further unrestricted disclosure byPurchaser that such information was acquired under an obligationof confidentiality."

Some of the examples just given make an exception for informationreceived from third parties whatever the time of that disclosure, while others limit the exception to revelations made prior to the disclosure of theother contracting party. This comes close to the exception made for priorknowledge.

In several examples, there is an express requirement for proof, arequirement already met as to the exception for prior knowledge. The following clause establishes a system of notification and of proof common tothe three exceptions that have been examined:

"... provided that within sixty (60) days from the time suchConfidential Information is disclosed to Seller ... Seller furnishesto Buyer reasonably convincing evidence that such ConfidentialInformation satisfies the requirements of (i), (ii) or (iii) above."


(d) Another exception, which is self-evident, is sometimes envisagedexplicitly: the promissor is relieved from his obligation of confidentiality ifhe obtains the consent of the promissee for a disclosure that would not otherwise be authorized by the contract.

• ''You shall not, without the prior written consent of the Company,disclose such confidential information to any person ..."

• "In addition to the disclosures permitted under paragraph (a) ofthis Article, any information received from the other party may bedisclosed with the consent of such other party as to content andrecipients of the disclosure."

(e) One might also envisage the possibility that one of the partieswould take steps to cancel the confidential status of one or another information furnished by it:

"Les obligations ... ne s'appliquent pas ... aux informations pourlesquelles la partie qui les aura revelees aura indique par ecrit al'autre partie qu'elle leur retirait la caractere confidentiel."

(f) Other exceptions turn on the limited nature of certain authorizeddisclosures:

• 'Je maintiendrai secretes ces informations re<;,:ues sur base de laconfiance qui m'est accordee pendant une periode de ... ans etje m'abstiendrai de les publier ou de les divulguer a des tiers, ycompris rna propre societe, dans la mesure OU elles depasseraientIe domaine des generalites."

• "Now, therefore Inventors and ... agree as follows: for 2 years afterthe effective date of this Agreement ... shall limit disclosure ofsuch information to opinions as to when and/or whether thearrangement or portions thereof can be commercially exploited."

(g) The foregoing exceptions and especially the first three (the publicdomain, prior knowledge, disclosure by a third party) are extremely common. However, certain confidentiality clauses do not provide for them ordo not include them all. One clause may limit itself to a mere generalexpression imposing confidentiality on all information provided. Anotherclause may provide the exception for the public domain but no others,and, in particular, not that for prior knowledge.

The attention of draftsmen is drawn to the inconveniences of suchomissions, inasmuch as these exceptions, if duly specified, appear eminently reasonable and they are in general use. The process of interpretation and an appeal to common practice may no doubt overcome many


drafting deficiencies, but clear and complete drafting is by its nature useful to avoid disputes.

3. Exceptions Made as to Persons (Sharing the Secret)

The obligation not to reveal information received is often also made subject to a different kind of exception. Permission may be given for the secretto be communicated to certain people. Firstly, this relates to members of thestaff of the enterprise but also, according to the circumstances, to its subsidiaries, its clients, suppliers, sub-contractors, distributors, advisers and evento public authorities. In many cases, the authorization to share the confidence is accompanied by an obligation to seek an obligation of confidentiality from these persons. These two aspects will be considered in turn.

(a) Categories of persons

1. Firstly, it is to certain members of staff that the information mayoften be transmitted, insofar as it is necessary so that the data might beexploited.40 This last qualification is often expressed by a reference to theaims of the parties.

• "Seller shall not disclose ... except to such of its employees ...who need such Confidential Information in order to properly perform the work."

• "Seller shall limit disclosure of the data to those of its employees having a need to know such data in order to carry out the Services."

• "The Proprietary Information shall be only disclosed to ... thosepersons within the ... organization who have a need to know andsolely for the purpose specified in this Agreement."

• "Nous nous engageons ace que seuls nos administrateurs, fondesde pouvoir, employes et autres representants qui sont concernespar l'Operation aient acces aux Informations."

The beneficiaries of this exception are sometimes defined broadly asin the above example; in other clauses an attempt is made to list the categories of personnel envisaged if only by way of example.

• "... only to those chosen servants, agents and employees to whomdisclosure is reasonably necessary for that purpose."

• "Any of such information may be disclosed to your directors, officers and employees ... who need to know such information forthe purpose of evaluating any such possible transaction betweenthe Company and you ..."

40 On this aspect, also see J. Huet & F. Toubol, op. cit., No. 30.


• "... to you and your 'representatives' (which term includes collectively your directors, officers, employees, agents or other representatives, including without limitation attorneys, accountants andconsultants) ..."

It will be noted that the last clause quoted includes persons who arenot actually employed.

One clause among those studied provided for the prior delivery of alist of those employees entitled to be shown the information:

"With respect to any exchange of Proprietary Information whichmay occur as a result of this agreement, it is expressly understoodand agreed that the below listed employees shall ... be the exclusive individuals authorized to receive Proprietary Informationunder this Agreement ..."

2. Some contracts authorize transmission of the information to subsidiaries and related companies, within appropriate limits.

• "The parties may transmit any information disclosed to itsAssociated Companies for evaluation ..."

• "Die Parteien sind sich daruber einig, dass die Gesellschaft ...diesen Tochter- und Beteiligungsgesellschaften nur solcheAuskiinfte iiber den Vertragsgegenstand geben wird, die fiir dieAusfuhrung der diesen ubertragenen Auftrage erforderlich sind."

Such disclosures may prove necessary, but attention is drawn to thespecial risk of unauthorized disclosure thus created. There are cases ofdisclosure to alleged "subsidiaries" that are merely correspondentsagainst whom no remedy will be available in the event of subsequent discovery. It is essential to know the identity of the third parties to whominformation may be transmitted and to take appropriate precautions inparticular with respect to the undertakings that should be subscribed bythose third parties and to the promissee's responsibilities arising fromtheir conduct.

In the absence of such provisions, the other companies in a group arenot generally entitled to the transmission of data. Some agreementsemphasize this:

"... it being understood that third parties shall also mean companies and/or persons controlling the Receiving Party or controlledby it."


3. In the case of suppliers and clients, sub-licensees and sub-contractors, distributors and tenderers and other categories of persons, it is sometimes necessary to tolerate the revelation of confidential information.41

• "Le licencie pourra toutefois communiquer ades tiers fournisseursou sous traitants toutes les connaissances techniques necessairespour la realisation et la mise en place du materiel."

• "... the party receiving such disclosure shall not disclose any of theknow-how ... to any person ... other than ... (b) responsible contractors, sub-contractors and machinery suppliers, only to the extentnecessary for erection, expansion and maintenance of the plants."

• "... unless such information must necessarily be disclosed byeither party to its customers, users or licensees of the Products, tobona fide authorised subcontractors and bidders to enable themto perform their contract or make bids to either party ..."

• "... except that disclosure may be made to buyers and potentialbuyers of the Product only to the extent necessary for their use."

This clause includes several qualifications:

• "... Cet engagement ne fait ... pas obstacle a la communicationa vos clients des informations normalement accessibles auxacquereurs de ce materiel; cependant, les plans de details resteront confidentiels sauf accord particulier de la direction de X."

Here is a particularly broad version:

"... any other persons to whom the handling on of said information may be necessary in order to fulfil the objective of this agreement ..."

Very frequently, the contract requires the promissor to obtain confidentiality obligations from these recipients; we will return to this. That is,however, not always the case:

"Each party may disclose on a non-confidential basis to their sublicensees and to purchasers and potential purchasers of theExperimental Compounds and Licensed Compositions, such ofthe aforesaid information as is reasonably necessary to facilitate thesale and use of the Experimental Compounds and LicensedCompositions and to facilitate the manufacture of the LicensedCompositions."

41 Id., No. 31.


On the other hand, it sometimes happens that a confidentiality clausecontains an express injunction against revelation of the information to certain categories of persons.

"En aucun cas, l'information sur Ie Prod~de ne sera communiqueeaux soustraitants, de B, qui, au titre de I'article 2, seront consideres comme des tiers."

4. Financial and insurance aspects may also cause necessary exemptions from confidentiality obligations:

• "... unless such disclosure to the extent required is ... reasonablynecessary for financing purposes."

• "... except ... information required for credit or insurance of theProject, to the extent necessary for such purposes."

5. The giver of the confidentiality undertaking may have authority toshare the information with his advisers:

• "... except to their respective professional advisers ..."• "Eu egard a toutes informations afferentes al' organisation de son

partenaire contractuel, ainsi qu'au deroulement des affaires dontil aura pris connaissance, X n'en fera pas de declarations envers lestiers et tiendra Ie secret absolu. En est exclu Ie conseiller juridiqueet fiscal de X ..."

• "Ce document contient des informations qui sont la propriete de... II sera traite confidentiellement. II est defendu de ... transmettre ou de reveler ades tiers les informations contenues, dansce document ... si ce n'est en cas de necessite pour permettre uneevaluation bona fide de I'offre."

• "Par derogation al'interdiction formulee al'article 2 du presentEngagement, nous nous reservons Ie droit de communiquer lesInformations a nos conseillers consultes dans Ie cadre del'Operation ..."

6. It is sometimes necessary to reveal the confidential information topublic authorities, for example, in cases of technology transfers, restrictionson competition, tax statements, labor regulations or financial operations.42

Where applicable that fact should be mentioned.

• "Each party may disclose ... to applicable government agencies,such of the aforesaid information as may be necessary to complywith applicable statutes and regulations relating in any way to themanufacture, use or sale of ..."

12 Id., lac. cit.


• "It is understood and agreed that ... may disclose on a confidential basis such information to . . . the Food and Drug Administration ... as may be customary or necessary ... to obtain NewDrug Applications."

• "... except that you may make such disclosures (after making reasonable efforts to both avoid such disclosure and advise theCompany of your intention to do so) which must be made underthe securities law."

• "... except with regard to Algeria, the following agencies: Ministryof Heavy Industry, Ministry of Finance, Customs ..."

• "Uber seine Vergtitung hat der Mitarbeiter dritten Personengegentiber Stillschweigen zu bewahren. Dies gilt nicht flir die FaIle,in denen er gesetzlich berechtigt oder verpflichtet ist, Angaben tibersein Einkommen zu machen, wie beispielsweise dem Finanzamt,dem Arbeitsamt oder einer sonstigen staatlichen Stelle."

• "Each party may disclose the other's Confidential Information tothe extent such disclosure is reasonably necessary in filing or prosecuting patent applications under the terms of the Patent TransferAgreement or to comply with government regulations."

7. This last example enables us to turn to the problem of constraintson confidentiality arising from the requirements ofjudicial or administrative procedures. It is a delicate subject. We will return to it in more detai1.43

At this point, we limit ourselves to quoting several clauses from our sample.

An exception may be provided in fairly broad terms:

• "The licensee shall not disclose ... unless ... ordered to do so bya Court of competent jurisdiction."

• "... unless such disclosure, to the extent required is . . . (b) reasonably necessary for the purposes of any ... legal proceedingsinvolving both parties; ... (f) reasonably required in proceedingstaken by either party for the enforcement of any of its rights andremedies hereunder."

But some contracts address the issue with very elaborate clauses:

• "In the event that either party is requested or required by anycourt or government agency or authority or pursuant to any subpoena, request for information, interrogatories, civil investigativedemand, or similar process to disclose any information received byit, it will promptly provide the other party with notice of such

43 Cf. infra, pp. 293-295; also see J. Milquet, La production en justice, par un cocontractant, de renseignements et de documents proteges par une clause de confidentialite, Rev. Dr. AJI Int., 1991, pp. 153-167.


request so that such other party may seek an appropriate protection order and/or waive compliance with the provisions of thisAgreement. It is further agreed that if, failing the entry of a protective order or the receipt of a waiver hereunder, the requestedparty is in the opinion of its counsel compelled to disclose suchinformation under the pain of liability for contempt or other censure or penalty, such requested party may disclose such information pursuant to such request without liability hereunder."

• "In the event that you or anyone to whom we transmit the information pursuant to this Agreement are requested or becomelegally compelled (by oral questions, interrogatories, request forinformation or documents, subpoena, civil investigative demandor similar process) to disclose the information you will provide Xwith prompt notice so that X may seek a protective order or otherappropriate remedy and waive compliance with the provisions ofthis Agreement. In the event that such protective order or otherremedy is not obtained and to the extent that X has not waivedthat portion of the information which your counsel advises you arelegally required to disclose, you will exercise your best efforts toobtain reliable assurance that confidential treatment will beaccorded to such information."

These clauses contain various interesting elements: the obligation towarn the other contracting party so that it may take the steps necessary forprotection or may release the secret, an obligation to try to obtain confidential treatment of the information on the part of the authorities44 or anexemption from liability for such obligatory disclosures.

Here are two further examples:

• "... the receiving party is entitled to pass on INFORMATION orparts thereof to the competent authorities to the extent requiredby law. In such a case, the receiving party shall inform the disclosing party about the legal requirement to communicate INFORMATION and the parties shall discuss in good faith about the bestmanner to narrow the scope of the INFORMATION to be communicated to the authorities."

44 In many cases, authorities are themselves legally bound to a duty of confidentiality concerning certain information transmitted to them. Cf., for instance, Article 287(former Article 214) of the EU Treaty. The Hoffmann-Laroche case and its tragic epilogue will be remembered (d. Stanley Georges Adams c/ Commission of the EuropeanCommunities, Eur. Court ofJustice, Nov. 7,1985, E.eR, 1985,3595; d.]. Biancarelli,Chronique internationale, Droit communautaire, Pum. Sc. CTirn. et nf; Pen. Cornp., 1986,pp.449-452).


• "Si par suite d'une action enjustice de l'application d'une loi oud'un decret du gouvernement Ie bene£iciaire se voyait dans l'obligation de divulguer des informations confidentielles couvertes parIe present contrat, illui incomberait alors d'en informer Ie fournisseur et si ce dernier Ie lui demande de cooperer avec lui pours'opposer acette divulgation. Aucune des deux parties ne sera passible de dommages-interets pour une divulgation survenant a lasuite d'une actionjudiciaire ou de l'application d'une loi ou d'undecret du gouvernement sauf si Ie beneficiaire manque a l'unequelconque de ses obligations stipulees par Ie present article."4:"i

These texts, and particularly the second one, are somewhat surprisinginasmuch as they seek to create obligations to cooperate within the restrictive application, or even the defeat of mandatory rules. Certainly the principles governing disclosure to the courts or to other authorities sometimesauthorize those concerned to seek dispensation, but, in many possible circumstances, at least the second foregoing clause would appear to be doubtfullegality. Even the mere obligation to warn one's partner of the demandmade by the authorities, also envisaged by the two preceding clauses, mightgive rise to problems of validity. We will return to this.

A more civic approach inspired the following clause:

"Der Verkaufer und der Kaufer vereinbaren, den Inhalt diesesVertrages vertraulich und gegeniiber Dritten geheim zu halten, essei denn, sie sind dazu verpflichtet, diesen gegeniiber einemGericht, einer Behorde oder anderweitig offenzulegen bzw.mitzuteilen. Die Vertragparteien werden in solchen Fallen nachbesten Kraften bemiiht sein, die Vertraulichkeit soweit als nurmoglich zu bewahren, ohne dabei aber den Gerichten oderBehorden die erforderliche Auskunft vorzuenthalten."

8. The following clause is interesting, authorizing, subject to certainconditions, disclosure for the purposes of scientific publication.

"Recognising the desire of the scientists involved in ... to publishcertain work done during ... in reputable scientific journals, theparties agree to confer and consult one with the other where anyanticipated scientific publication by the employees of one partyarising from ... ought, for the sake of completeness, to containthe Technical Know How or Confidential Information of the otherwith a view toward resolving the competing interests of confidentiality and desired scientific credit through publication in a man-

15 Clause taken from a confidentiality agreement cited byJ. Huet & F. Toubol, op. cit.


ner fairly and reasonably consistent with the interests of the partieson the one hand and those of the scientists concerned on theother. No such publication shall be made, nor any manuscript submitted for publication, until each party has had ample opportunityto review the same and, if desired, to effect associated patent filingsso as to preserve u.s. or foreign patent rights. Should the party towhom the manuscript is submitted reasonably believe that publication thereof would be detrimental to its interests such party shallinform the other of such fact and its reasons and the other partyshall not publish the same for a period of 90 days thereafter andshall delete any Technical know-how or Confidential Informationfrom the manuscript as directed by the other party to whom themanuscript is submitted for approval."

9. Finally, we would like to quote a clause whose general structure, inspite of its apparent strictness, would seem to permit without any restriction, communication to any person of the information provided the disclosure is justified by the purposes of the contract.

"Any know-how or other information, advice or assistance madeavailable by either Member Firm to the other shall be retained inthe strictest confidence and shall not without the express priorwritten consent of the initial supplier of the information be disclosed or divulged to anyone ... in any respect or to any extentother than for the purpose hereof."

The purposes of the contract can certainly justify exceptions from theobligation of confidentiality, but as far as drafting is concerned, one isstruck by the contrast between the strictness, which appears in the greaterpart of the clause, and the relative vagueness of the last six words.

Some contracts do not authorize initially the disclosure of data to certain third parties but envisage a specific consent.46 Here are two examplesrelating, in one case, to affiliate companies and subcontractors and in theother to advisers.

• "Chaque partie devra obtenir l'accord de l'autre partie pourdivulguer ases Societes Apparentees ainsi qu'aux soustraitants ...Ies informations confidentielles de l'autre partie ..."

• "X may disclose Proprietary Information to individual consultantsor employees of companies that become consultant companieswho need it to carry out the promotional activities hereunder, pro-

46 Cf. mutatis 'ffliUtandis, the similar exception described above concerning the typesof information excluded from the secrecy obligation.


vided Y has authorized in writing to extend an agreement to eachsuch consultant ..."

This recalls the warning expressed above in connection with disclosureto companies in a group.

Sometimes the contract formally permits disclosure to certain thirdparties and establishes a system of permissions for disclosure to others:

• "In the event either of the parties should desire to communicateall or part of the provisions of this agreement to parties other thanthose set forth above, it must obtain prior written approval of theother party."

• "When disclosure ofY data to any third party is essential, X will priorto such disclosure obtain Ys consent to disclose such Y data ..."

• "Each party may make such further disclosures as may be permitted by the other party in writing and such permission shall not beunreasonably withheld."

Visits to factories give rise to many indiscreet glances. The followingclause arises in this context:

"Le vendeur pourra organiser des visites de l'ouvrage notammentpour Ie montrer a ses clients. A cet effet, Ie vendeur communiquera aI'avance au Maitre de I'Ouvrage, les noms et qualificationsdes visiteurs ... Toutes prises de vue et visites sur Ie chantier sontsubordonnees al'accord prealable ecrit du Maitre de I'Ouvrage."

Even when authorized by the contract, disclosure to third parties maygive rise to the need for notification to the other contracting party. Someexamples have already been given, in particular in connection withdivulging information in court proceedings. Here is another example:

"A shall keep B informed in writing of any and all disclosures pursuant to paragraph (a)."

It is not rare to require lists of persons with privileged information.

• ''You further agree ... to furnish us a list of officers, employees andconsultants to whom you have given access to such ConfidentialInformation ..."

• ''Y shall once a year within 20 days of a written request from X supply X with an accurate, detailed and up-to-date record in writing ofall employees and consultants ofY to whom such source has beendisclosed. "


The supply of the list is sometimes required in advance:

''You agree to notify ABC, prior to the delivery or disclosure of anyinformation to your third party representatives or affiliates, as tothe identity of such representatives or affiliates."

We have already seen above similar clauses envisaging the prior supplyoflists either of employees liable to receive the information or of visitors tothe works.

(b) Extension of the Obligation of Confidentiality. Are persons withwhom the secret may be shared themselves expected to keep the secret?

Initially, such persons are not in a contractual relationship with thesupplier of the information and therefore the confidentiality clause doesnot bind them directly.

In certain cases, they may nevertheless be subjected to an obligation ofconfidentiality resulting from their employment contract, from the law ortheir professional status.17 The supplier of the information will wish to reinforce its legal protection. Quite frequently it requires the contracting partyto obtain a specific confidentiality undertaking from the persons to whomthe secret is to be transmitted. This practice first gives rise to a new commitment on the part of the other contracting party (1) and then brings thethird party within the bounds of a personal confidentiality pledge (2).

1. The initial recipient of the data finds himself subject to various obligations as concerns the transmission of information to third parties.

Some clauses consider it useful to provide expressly what seems anobvious requirement, viz. to indicate the confidential nature of the information to those to whom it is transmitted:

• "Each party will divulgate the received information to its employees ... stressing to these employees the confidential features ofsuch information."

• Such directors, officers, employees and representatives shall beinformed by you of the confidential nature of the information andshall be directed by you to treat such information confidentially."

As is the case with the second clause just quoted, other versions putemphasis on the obligation for the contracting party to require compliancewith the confidentiality from staff.

17 Cf. infra, pp. 289-290.


• "Chaque partie ... s'engage adonner les instructions approprieesaux membres de son personnel appele aavoir connaissance d'informations confidentielles de l'autre partie dans Ie cadre de l'execution du present contrat."

• Each party shall procure that its respective servants and agentsshall at all times during and after expiry or termination of thisAgreement keep confidential all technical documents and information provided to it ..."

The recipient contracting party undertakes personal responsibility inthis respect. This is emphasized in numerous clauses.

• ''You agree to assume responsibility for the actions of such of yourexecutives and employees who may have access to technical information."

• ''You shall be responsible for any breach of these obligations by anyof your officers, directors, employees or professional advisors."

• "Each party guarantees the respect of the secrecy by its employees."• "Chaque partie se porte fort du respect du secret par son personnel."• "Le preneur de licence se porte fort pour ses agents, partenaires,

compagnies affiliees, parties contractantes, personnel, actionnaireset subalternes, de prendre toute mesure pour que Ie produit soitconserve et protege contre Ie vol, la duplication, la publication, ladivulgation et la communication ades tiers."

• ''You will be responsible for any breach of such terms by yourRepresentatives, and will indemnify and hold harmless PARENT,any other member of the PARENT-group and any successor in titleto the Possible Transaction for any losses, damages, charges, feesor expenses arising out or resulting from such breach."

One notes the variations between these clauses. The legal basis of theundertaking to be responsible for indiscretions of another will be discussedbelow.18 We will also quote the following more detailed clause, whichexpressly excludes any responsibility on the part of the firm if the indiscretion is exclusively attributable to the one person responsible and thefirm having taken all measures that could reasonably be required:

"X respondera de cualquier infracci6n de esta obligacion de confidencialidad que fuese cometida por cualquiera de las personasmencionadas en el parrafo anterior, siempre y cuando el infractorse halle bajo el control efectivo de X y sea probado que X noadopt6 las medidas razonablemente exigibles y adecuadas para elcontrol de la informaci6n confidencial recibida.

18 Cf. infra, pp. 288-289.


"Por el contrario, X no asume responsabilidad de ninguna clasecuando la violacion de las obligaciones de confidencialidad seaexclusivamente imputable a la persona que hubiere cometido talinfraccion y, en 10 demas, habiendo adoptado X todas las medidasrazonablemente exigibles, y adecuadas para el control de la informacion confidencial recibida. Para este ultimo caso, Y en este actose subroga desde ahora y para tal supuesto, y X presta su conformidad, en todas las acciones que pudieran corresponder a Xencaminadas a exigir al autor de la violacion las responsabilidadesciviles y penales que, en su caso, procediesen."

But as we have said, it is common for the clause to require the recipient contracting party to obtain signature of a specific undertaking of confidentiality from recipient third parties in such a way as to bring them, too,into a contractual net:

• "Licensee will obtain similar written agreements from its employees to whom such information is disclosed."

• "Each member shall impose the same confidentiality obligations ...upon its affiliates, subcontractors, vendors and other third partieswho are in association with it and may have access to any confidential information during the term of this agreement."

• "Le licencie fera signer aces tiers fournisseurs ou sous-traitants unengagement de garder secretes les dites connaissances techniquestransmises dans Ie cadre de ce contrat."

• "Seller agrees that each of its employees having such need to knowshall execute a secrecy agreement having equivalent terms andconditions to those set forth in this Article ... and naming Buyeras intended third party beneficiary."

The view is sometimes taken that the general provisions of an employment contract should be recognized as adequate and sufficient:

"The Receiving Party shall bind its employees and/or delegateshaving access to the Information by adequate secrecy agreements.The Owner expressly acknowledges that the standard terms of thecontracts of employment between the Receiving Party and itsemployees contain an adequate secrecy agreement."

2. The persons to whom the information is transmitted are thus invitedto provide a personal undertaking of confidentiality.19

If a member of staff is concerned, the commitment may already be provided, as has already been mentioned, by a general clause written into theemployment contract itself. Here is an example of such a provision:

49 On this point, d. also J. Jehl, op. cit., p. 170; J. Huet & F. Toubol, op. cit., No. 30.


"The Executive shall not during his employment hereunder (savein the proper course thereof) or at any time after its terminationfor any reason whatsoever disclose ... any confidential or secretinformation which he has or may in the course of his employmenthereunder become possessed relating to the Company or itsAssociated Companies or any of its or their suppliers, agents, distributors or customers ..."

Upon entry into employment with the firm, the employee is sometimesrequired to enter a separate confidentiality undertaking drafted in muchmore detail.

In general, the provider of confidential data insists on a more specificundertaking that requires the adherence of the members of staff to theconfidentiality clause in the contract by virtue of which the information hasbeen transmitted or which reproduces its terms. Such a requirement maybe set out as follows:

"We, the undersigned, hereby declare that we belong to the person-nel of as ... and that we have read the agreement signed by ...dated concerning the secrecy obligations. We further indicate thatconsidering their economic value as such, all information and documents relating to the Process shall not at any time be ... divulgedexcept for the purposes of this preliminary agreement or for those ofsome subsequent agreement between the parties hereto."5o

But for whose benefit is this undertaking provided? The employer orthe initial provider of the data? Both solutions appear in practice, but theterms used are not always clear on this point.

A clause quoted above required the designation of the provider as thethird-party beneficiary of the undertaking by the employee. In French law,such phrasing creates an obligation by the employee toward his employer,accompanied by a stipulation "for the benefit of a third party" as concernsthe original provider. We will return later to these delicate legal problems.51

The following example leaves no room for doubt. The undertaking isdirectly provided by the employee in favor of the provider of the data:

"11 est prevu que Ie soussigne ... demeurant participe auneintervention de son employeur, la societe International(France) S.A. aupres de la societe x, dans Ie cadre d'un contrat deprestations de services informatiques.

50 Clause taken fromJ.M. Deleuze, op. cit., pp. 37-38.

51 Cf. infra, pp. 289-290.


"Le soussigne s'engage personnellement par Ie present documentvis-a-vis de la societe x, qui accepte, au secret sur les informationsqui viendront a sa connaissance dans Ie cadre de son intervention.Tous les renseignements qui lui seront fournis, tous les documentsqui lui seront confies ou qu'il elaborera dans Ie cadre de son intervention, tous les entretiens auxquels il participera seront consideres par lui comme confidentiels.

"II reconnait que son attention a ete attiree sur Ie caractere particulierement sensible des informations sur les recherches, les procedestechniques et de fabrication, les systemes d'information et les logiciels informatiques de la societe X et des societes du Groupe.

"Sauf autorisation expresse, il ne communiquera pas a des tiers desdocuments, etudes, logiciels, etc. vises par Ie present engagement.De meme, il n'en conservera pas par-devers lui au-dela de sonintervention, sauf autorisation expresse et ecrite.

"Font exception au present engagement ...

"Cet engagement est valable pour la duree de l'intervention dusoussigne et les vingt annees suivantes. II ne sera pas modifie parun eventuel changement d'employeur du soussigne.

"Fait en deux exemplaires, dont un a ete remis au soussigne."

The data, as we have seen, may also be transmitted to certain persons whoare not employed by the initial promissor of confidentiality. Such persons mayalso be required to enter into specific confidentiality undertakings.

It can happen that the roles are reversed. In the period of negotiations,confidential information is sometimes provided initially to someone sentby the firm showing interest, for example, a specialized technician or anaccountant, in order to permit that person to render an opinion in verygeneral terms ("the process is interesting," "the financial situation ishealthy," etc.). The emissary is required to enter into a confidentialityundertaking not to reveal the information even to his own company, thelatter being required to recognize that undertaking! Here are examples oftwo documents of this type:

A pledge by the emissary:

'Je maintiendrai secretes ces informations re<;;:ues sur base de laconfiance qui m'est accordee ... etje m'abstiendrai de les ...divulguer a des tiers y compris rna propre societe dans la mesureOll elles depasseraient Ie domaine des generalites."


Related undertaking by the company:

"Nous declarons avoir repl une copie de l'engagement signepar M et relatif aux informations que nous l'avons charge derecevoir de X ... Nous declarons ratifier celui-ci et en faire notresles clauses y continues....52

3. A very delicate problem arises with respect to the transfer to a thirdparty of a contract containing a confidentiality clause, either through a specific transfer or in the event of the takeover of the promissor company (wewill treat as similar the taking of a sufficiently large share interest53). Insome cases, there is no difficulty that the transferee company should succeed to the rights and obligations of the transferor and hence to the obligation of confidentiality, if such transfer can be achieved in accordance withthe requirements of the applicable law. But it is otherwise in different cases,in particular, if the contract is assigned to a direct competitor of the partywho provided the confidential information, or if the promissor should fallunder the control of such a competitor of the promisseeJi4

Rare are those confidentiality clauses that address this problem. Here,however are two examples:

• "This agreement may not be assigned by you without our prioragreement in writing."

• "The agreement shall inure to the benefit of each of the Partiesand may not be assigned in whole or in part by either Party without the prior consent of the other Party, except that each Party'sinterest shall be assignable without the consent of the other in pursuance of any merger, consolidation or reorganisation or voluntarysale or transfer of all or substantially all the assigned Party's assetswhere the merged, consolidated or reorganised corporation orentity resulting therefrom or the transfer of such sale or transferhas the authority and power effectively to perform that Party'sobligations to the other under this Agreement."

52 Examples given by J.M. Deleuze, op. cit., pp. 138-139.

53 Similar problems arise when public companies are privatized and their activitiesare taken oven by private companies.

54 A similar situation appears in consortia, when a defaulting company, replaced bya newcomer, is compelled to leave its know-how at the group's disposal, while it does notparticipate any more to the benefits of the operation (a different, but equally problematic, situation occurs when a firm voluntarily withdraws from a group after binding themembers by a confidentiality and non-use undertaking in relation to the informationit has transferred, and then that firm transfers its knowledge to a rival group).


One will note that the second clause sees no difficulty in transferringresponsibilities resulting from a total transfer of the business, thus notaddressing the two concerns expressed above.

A solution may be found by combining another clause of the contract,which envisages that it may be terminated in the event of transfer or,change in the control of the other contracting party, with the provision forthe confidentiality obligation to survive the contract. 55 One should notunderestimate, however, the difficulty in supervising the implementationof the proposed technique under such circumstances.

4. The Intensity of the Obligation-Steps to Be Taken

(a) The promissor under a confidentiality undertaking is obliged tokeep a secret but what is the intensity of his obligation? Is he obliged to offeran absolute guarantee that the information will not be revealed, or may herely, in the case of disclosure, on certain grounds for exoneration, or doeshe only undertake a less demanding obligation, for example, merely to do"his best" to keep the information confidential? We return here to the distinction between obligations by way of guarantee, obligations to reach a specific result and obligations as to appropriate means (obligations de garantie,de resultat and de moyens) , which originate in French law but are present inthe same form or more implicitly in many other legal systems. This problemconcerning the "intensity" of the obligation has been discussed more thoroughly in the preceding chapter on best efforts clauses.56 Such questionsalso arise in connection with confidentiality obligations.

Some clauses appear to impose absolute obligations:

• "X will hold (the Information) in strict confidence and will not disclose it to any person."

• "The Information shall be retained in the strictest confidence andshall not without the express prior written consent of the initial supplier of the Information be disclosed or divulged to anyone ..."

• "Ellicenciatario debera tratar la informacion, materiales y Knowhow que Ie han sido facilitado por medio de este contrato con lamas estricta confidencialidad...."

But in other examples, the expressions used appear less strict:

• "Each member shall use its best efforts to keep in strict confidence ...all commercial and technical information ... acquired by it ..."

55 On this point, d. infra, Chapters 11 and 13.

56 Cf. supra, Chapter 4.


• "The Licensor and the Licensee further agree and covenant ... touse due diligence to protect ... the Know-how furnished hereunder during the term of this Agreement."

• "The Company agrees that ... it will take reasonable steps not todisclose ... to any third parties."

• "Le licencie s'engage expressement ... a. prendre toutes les precautions raisonnables pour qu'aucune information ne soit transmisea. des personnes non specialement autorisees par Ie concedant."

• "Both parties shall use all reasonable efforts to maintain in confidence the fact that Recipient and X have entered into discussionsreferenced above, the subject of such discussions and the termsand conditions of this 'Agreement' as well as any other 'Agreement' to be entered into by them."

A formula seen more than once adopts as a criterion the standardsused by the promissor himself for his own business:

• "Each party shall use the same efforts to maintain confidential andto prevent disclosure of ... as such party uses to maintain confidential and prevent the disclosure of its own proprietary information or trade secrets of a similar nature."

• "Chaque partie ... prendra vis-a.-vis des informations confidentielles qu'elle re<;,:oit ou obtient de l'autre partie les memes mesuresqu'elle-meme prend vis-a.-vis de ses propres informations confidentielles pour en empecher la publication, la divulgation et lacommunication a. des tiers."

• "Toutes les donnees confidentlelles relatives a. l'entreprise deI'utilisateur et qui seraient remises a. I'Universite, pour l'executiondu present contrat, seront protegees par elle dans la meme mesurequ'elle protege ses propres donnees."

Needless to say, one should not accept such a clause before beinginformed of the way the other enterprise is managed.

Other clauses make use of a combination of criteria:

• "The Proprietary Information received from Y shall be protectedand kept in strict confidence by X which must use the same degreeof precaution and safeguards as it uses to protect its ownProprietary Information of like importance, but in no case any lessthan reasonable care."

• "X shall not be liable for the inadvertent or accidental disclosureof information if such disclosure occurs despite the exercise of thesame degree of care as it normally takes to preserve its own proprietary information of a similar nature supplemented by theextraordinary care specified in Paragraph 1 hereof."


The first paragraph of this clause, after stating the obligation of confidentiality, lists various steps to be taken, in particular as concerns copiesand communications to staff and certain third parties.

One may be surprised at the relative laxity of these expressions. Shouldnot a confidentiality undertaking be expressed in terms of an obligation toachieve a specific result (obligation de resultat)? As one commentator emphasizes, this weakening of the rigor expected can be explained by a realisticattitude. The provider of data may himself, within its own enterprise, havehad experience of the difficulties of keeping a secret. It is not wise to insiston more than the promissor can reasonably achieve.57

(b) It is significant that different formulae are sometimes used according to whether it concerns keeping the secret oneself or causing it to bekept by others:

"Smith agrees:

"( 1) That it will not disclose (except to a subsidiary or affiliate ofSmith), or commit any act or omission that would impair or depreciate the confidential nature or value of, and

"(2) That it will use its best endeavours to prevent any subsidiaryor affiliate of Smith from disclosing ..."

Even as concerns staff, flexible formulae are common:

• "We shall ... take such steps as may be reasonably desirable toenforce such obligations."

• "Chaque partie prendra toutes les mesures raisonnables pour s'assurer que les dites connaissances techniques provenant de l'autresoient traitees comme secretes par les membres de son personnelou de celui de ses filiales et ne soient divulguees."

• "Chaque partie prendra vis-a-vis de son personnel les garantieshabituelles prevues dans l'industrie pour eviter toutes divulgations ..."

Some clauses, however, stipulate more strictly:

57 J.Jehl, of}. cit., p. 169.

J. Huet & F. Toubol (op. cit., No. 34) apparently have no hesitation to state that thepromissor of a confidentiality undertaking is necessarily under an obligation de r-esultat.Most of the clauses cited above seem to contradict such analysis. O. Capatina, (op. cit.,No.6) considers that an undertaking not to disclose normally possesses the features ofan obligation de resultat but that parties may define it as an obligation as to the appropriate means.


''You further agree to vigorously enforce, at your expense, suchagreement ..."

It may prove difficult in certain cases to obtain the specific secrecyundertaking from third parties by reason of the number of people involvedor the sensitivity of certain contracting partiesJi8 The obligation to obtainsuch commitment is therefore softened.

• "... wherever reasonably practicable, X shall obtain a written statement from each of its employees having access to the ProprietaryInformation to maintain the same confidential ..."

• "X shall procure that all employees, consultants and sub-contractors involved with the Commercial Development Programme shallbe subject to the same obligations of confidence ... and shallenter into a suitable secrecy agreement in a form approved by¥,or, where or insofar as this is not reasonably practicable, X shalltake all reasonable steps to ensure that any such employees, consultants and subcontractors having access to any of the Know Howare made aware of the obligations of confidence attached hereto."

(c) The obligation is sometimes expressed by reference to the measures to be taken with a view to keeping the data confidential:59

• "Les parties s'engagent aprendre toutes dispositions approprieesen vue d'eviter la divulgation du know-how."

• "Ellicenciat.ario debera ... tomar todas las mesuras necesarias paraevitar la filtraci6n de los conocimientos hacia terceras partes ..."

These measures are sometimes the subject of detailed instructions.

1. Certain formulations concern the location of the confidential information, and the restriction of access to the data:

• ''You shall keep a record of each location of the Information ..."• "X shall keep all documents and any other material bearing or

incorporating any of the Proprietary Information at the usualplace of business of ... as given above."

• "I undertake to ensure that any documents which are in my possession will be safeguarded and will be kept in a locked place towhich free access is not available."

58 The measure is psychologically impossible in cases where the third party is alreadybound to secret by professional status. One cannot imagine, for instance, to require suchan undertaking from a barrister.

59 On this aspect, also see G. Hertig, Of). cit., p. 222; J. Huet & F. Toubol, Of). cit., p.32; o. Capatina, Of). cit., No.6.


• "X shall not store, record or otherwise retain any information atany time on any computing or other equipment which is connected to any telecommunications system except for communications relating to ... 's interest in possible licensing under inventorsrights."

2. Concern is sometimes expressed to avoid any mixing:

• "X shall keep separate all Proprietary Information and all information generated by ... based thereon from all other records,documents, drawings files and the like."

• "Each of the Parties undertakes to use all due diligence to keep allsuch Intellectual Property hereunder as separately identifiableitems properly secured and adequately protected and as the proprietary and confidential property of the furnishing Party and further undertakes that any integration or incorporation of the samewith Intellectual Property belonging to the receiving Party shallonly be done on the basis that such integrated combined or intermingled Intellectual Property shall not be disclosed or communicated to any third party without the consent of the furnishingParty, which shall not unreasonably be withheld."

3. Walls have ears. Indiscretions may be involuntary. This is pointed outby the following clause taken from an employment contract:

"Business matters should not be discussed in public places, including for this purpose our own staff restaurants, or where they canbe overheard. Care should be exercised even in the corridors andlifts of our own offices."

4. The same contract also expresses concern about avoiding involuntary written indiscretions:

"The use of code or other names or combinations of names (whichmay give an indication that an important or substantial transactionis pending) should be avoided in anything that will have generalcirculation-in particular in luncheon lists."

5. The problem of copies of documents constitutes a leitmotiv in thoseclauses that set out the steps to be taken. GO

60 On the problem of copies in contracts in the computer field, d. Y Poullet, op. cit.,pp. 957-959.


In some cases, all copying is forbidden:

• "Consultant agrees that he shall not make any copies whatsoeverof Proprietary Information."

• "I undertake not to take copies of such documents and not to permit others to do so."

More generally, copying is limited to that strictly necessary and/ormade subject to the agreement of the other contracting party:

• "X shall ... make copies of the Proprietary Information only to theextent that the same is strictly required for the purposes of its evaluation by ..."

• "Le preneur de licence mettra tout en ceuvre pour eviter que desinformations confidentielles ne soient dupliquees ou portees a laconnaissance d'autrui, en dehors du cas prevu sous Ie paragraphe5 (back-up)."

• "We will not without prior written consent make any notes,sketches, drawings or photographs or in any other way whatsoevercopy the Information ..."

The following clauses are particularly detailed as to the making ofcopies:

• "We will make no more copies of the Information than is essentialfor the agreed purposes and will make and maintain a register ofthe information and each copy thereof or part thereof showing thecustody and whereabouts of each copy. We will provide you with acopy of such register at intervals of ... and will permit you toinspect the register at any reasonable time."

• "The parties agree that Information disclosed is and will remainthe property of the disclosing party, and that drawings or otherwritten or printed data included therein are not to be copied orreproduced, mechanically or otherwise, without the express written permission of the disclosing party, except for such copies as thereceiving party requires for internal circulation for evaluation purposes. The parties agree that the receiving party may keep allInformation disclosed for 90 days for purposes of evaluation. Aftersuch time the originals and all copies of such drawings and otherwritten data, except one copy for the Legal Department files, andany samples and devices are to be returned within 20 days afterrequest by the disclosing party, unless otherwise agreed in writingby the disclosing party. The disclosing party agrees to archive onecomplete set of the disclosed Information."


It is hardly necessary to point out that the checking of compliance withthese provisions can be particularly difficult.

6. Some clauses make cumulative use of several of these various ideasadding obligations as concerns compliance with secrecy by members ofstaff and concluding the list with a formula of general application such asthe following:

"In addition to the foregoing stipulations of this article, theRecipient shall take every other possible measure reasonably opento it to prevent the Proprietary Information from being made available to any third party."

7. The penultimate example touched on yet another aspect of the stepsenvisaged to protect confidentiality. Clauses sometimes express concernover the use of documents containing the information in the event of abreakdown in negotiations or the termination of the contract. Commonly,provisions provide for the return or destruction of documents. One findsvarious references to copies. Here are a few examples:

• "In the event discussions with respect to a possible acquisition ofthe Business or other transaction with ABC are terminated, uponABC's request the portion of the information furnished or madeavailable to you or your representatives by ABC or any of its representatives shall be returned to ABC without your retaining copiesthereof and all other Information will be destroyed without yourretaining copies thereof. Such determination will be confirmed inwriting by an officer of the Company."

• "On completion or earlier termination of the Agreement unlessotherwise agreed each party shall return to the other the secrettechnical documents and information that have been provided toit by the other party together with any copies thereof, and uponrequest also return all other technical documents and informationprovided by the other party under the Agreement."

It is sometimes allowed to keep a single copy, for purposes of archiving,or more particularly, in case of possible later litigation:

• ''Yagrees to return all but one file copy of Proprietary Informationupon written request by ..."

• Upon termination of this Agreement, Engineer shall return ... allbusiness and technical information received ... except that inaccordance with usual practice Engineer shall be entitled to retainone copy thereof for its record purposes only."


• "The Receiving Party agrees that ... it will promptly return ordestroy (with such destruction to be certified to the DisclosingParty) all Evaluation Material disclosed to it, without retaining anycopy thereof, except that one copy of such Evaluation Material ...may be retained in the legal files of the Receiving Party ... for thepurpose of defending or maintainng any litigation relating to thisAgreement or such Evaluation Material."

The destruction of documents may be envisaged during the course ofthe contract, as in this clause taken from an employment contract:

"Confidential documents and drafts which are no longer requiredshould be shredded or thoroughly torn up."

Some clauses take care to deal not only with the documents providedto the other contracting party but also those that the latter creates on thebasis of information provided:

• "All written material, including but not limited to worksheets, testreports, manuals, lists, memoranda, either furnished to Seller byBuyer directly or indirectly or prepared by Seller, containing dataand information referred to in Section 9.1 above shall remain orbecome the property of Buyer and shall be returned and/or givento Buyer at the expiration or termination of the Service Period."

• "Upon the termination of my employment with the Company, Ishall deliver to the Company all documents which contain anyConfidential Information which are in my possession, including allcopies thereof, whether the same were prepared by me or others."

An interesting system may be organized for the documents drawn upby the promissor himself:

"All Information, except for that portion of the Information whichconsists of analyses, compilations, studies or other documents prepared by us, or by our Representatives, will be returned to youimmediately upon your request and we agree not to retain anycopies, extracts or other reproductions in whole or in part.Information which consists of analyses, compilations, studies orother documents prepared by us, or by our Representatives, will beheld by us and kept confidential and subject to the terms of thisAgreement, and destroyed upon your request."

Here is a clause that extends the obligation to return the documentsto copies made by a third party:


"When submitting your bid to us you will return to us all TechnicalInformation received from us along with any and all copies thereofmade or acquired by you and your sub-contractors."

The following example envisages the return or destruction of documents "at any time":

"At any time the Recipient will return all Confidential Informationreceived from X hereunder, Including all copies thereof, ordestroy same and certify in writing to X that all ConfidentialInformation has been destroyed."

Some skepticism may be justified as to the strictness of the obligationsto return. The example below betrays such fears:

"In the event that this Agreement terminated pursuant to the provisions of Section 6, X and Y shall each use all reasonable efforts tocollect and return to the other any and all blueprints, drawings,written reports, letters or memoranda or notes which have beenreceived from or contain information received from the otherunder the provisions of this Agreement or relating thereto."

The return or destruction of documents does not put an end to theobligation of confidentiality. It may be as well to point this out:

"Notwithstanding the return or destruction of any Material, youwill continue to be bound by your obligations of confidentialityand other obligations hereunder."

5. Duration

(a) The confidentiality obligation is, more often than not, limited intime.

In many cases, it carries a fixed duration. The periods met, in practice,are extremely variable. Relatively short periods of 12 to 18 months arefound in some cases, in particular, as concerns data in an application fora patent; confidentiality is only justified during the period of the application. An inventor may also promise not to reveal the process to any thirdparty during the brief period of an option granted to a firm that is considering a licence. More often, however, the periods envisaged are muchlonger easily extending to up to ten or 20 years. 6 )

The starting point of these periods varies from clause to clause.

61 About the usual length of such periods, also see J. Jehl, op. cit., pp. 170-171.


Frequently, the period starts from the disclosure of the secret:

• "The obligations of this Part V shall, with respect to each item ofinformation, continue for four (4) years after the disclosure ofsuch item of information from one party to the other."

• "For a period of ten years after the date of disclosure hereunder ..."

Some periods run from the date of the making of the contract, perhaps an easier date to use when it comes to the question of proof:

"X sera delie de l'engagement de confidentialite au bout de 18mois apres la signature du present accord en ce qui concerne Iecaractere confidentiel des informations rec;ues."

Other starting points can be chosen. Thus an obligation may apply:

• " until five years after the start of commercial use of the project,"• " pendant toute la duree du present contrat, plus une periode

additionnelle de sept ans."• "... until five years after X shall have completed the work provided

for in article 9b."

The use of a starting point, which is delayed, clearly extends the periodof the confidentiality obligation. 62

Confidentiality clauses entered into during negotiations may draw distinctions as to the period of the obligation according to whether agreementis reached or not. Here is an example of a proposed acquisition of sharesin the capital of a company:

"La obligaci6n de confidencialidad asumida por X de acuerdo conlas stipulaciones anteriores y, en consecuencia, la obligaci6n delpago de une indemnizaci6n alzada 0, en su caso, de los danos efectivamente sufridos, a que se obliga X de acuerdo con 10 dispuestoen la clausula anterior, sera mantenida por X hasta la fecha en quetenga lugar la adquisici6n por X de la participaci6n en el capitalsocial de ... En el supuesto de que dicha adquisici6n no tuviesefinalmente lugar, obligaci6n de confidencialidad y la garantia querespecto de la misma presta se mantendran efectivas por un periodo maximo de cinco anos, excepto en aquellos casos en que lainformaci6n confidencial perdiese obviamente tal caracter pordarse alguno de los supuestos a que se refieren los numeros 3 y 4de la clausula primera."

62 The duration of the undertaking can also be determined by reference to a datead quem, as in the following clause: "The present undertaking will remain in force untilJune 30, 2008."


This clause, drafted with care, seeks to control at the same time theeffect of the penalty clause, which punishes breaches of confidentiality andit specifies that the obligations shall end before their natural term if theinformation ceases to be confidential.

(b) Confidentiality clauses often belong to that group of undertakings that survive the contract, the subject of another chapter of thisbook. 53 The need for discretion can remain as important as ever after theexpiry of the contract that gave rise to the disclosure. An ex-licensee, anex-distributor, an ex-employee must remain just as respectful of the confidentiality of information received as they had to be during the courseof their collaboration.

The fixing of a specific period for the confidentiality obligation, extending beyond the end of the contract, is an expression of this concern. It isoften said explicitly that this obligation survives the contract so as to avoidany doubt in the event the contract should be prematurely terminated:

• "The obligations of the licensee under this article shall survive thetermination of this agreement."

• "Diese Verpflichtung gilt auch fur die Zeit nach Beendigung desVertragsverhaltnisses. "

• "The purchaser and Contractor hereby agree that the obligationscontained in this Article ... shall not be affected by a Terminationand/or Cancellation of this Contract under Article 33 herein."

• "A's obligations under this Article ... , in spite of termination ofthis Agreement for any cause, shall continue until twenty (20)years from the Effective Date."

• "The terms and conditions of this Confidentiality Agreement shallcontinue in force without limitation for a period of ten (10) yearsfrom the date hereof unless and until it is superseded by expresswritten provision to the contrary in any definitive agreementbetween PARENT ... and you for the sale and purchase of thebusiness ..."

(c) Some duration provisions return to questions already examinedabove. Thus, data, which were already in the public domain when they weretransmitted, are excluded from the confidentiality obligation. It is oftenstipulated that the obligation ceases when the data enter public domainduring the course of the contract. The Spanish clause quoted is an illustration and let us consider from this aspect another example:

"... unless and to the extent such information is or later becomesgenerally available to the public."



It is the same, mutatis mutandis, for information received lawfully froma third party:

"Le present engagement ne s'appliquera pas aux informationsdont vous pourriez etablir ... qu'elles vous ont ete communiqueesulterieurement par un tiers pouvant Ie faire licitement et sansrestriction quant a I'usage ou au caractere confidentiel des ditesinformations. "

In such cases, the confidentiality obligation is terminated prematurelyas to information that has come into public domain or has been revealedby a third party in such circumstances.

(d) Expiry of the stipulated period terminates the confidentiality obligation. The effect is automatic as a matter of law, but certain clauses state itexpressly:

"A l' expiration de la periode de trois ans definie ci-dessus,chaque partie n'aura plus aucune obligation de quelque natureque ce soit a l'egard de I'autre partie en ce qui concerne lesinformations confidentielles de cette derniere, et sera done librede les publier, de les divulguer et de les communiquer ades tierssans aucune restriction ..."

(e) Certain confidentiality obligations have an undefined period ofapplication, as with the two following clauses:

• "I shall not ... disclose any Confidential Information, both duringmy employment with the Company and at any time thereafter ..."

• "X shall, at all times during and after expiry or termination of thisAgreement, keep secret and confidential ... "61

Similar clauses may refrain from indicating any duration for the confidentiality obligations. While such clauses are rare, they do exist.

Indeterminate undertakings may nevertheless come to an end whenthe information comes into public domain or by the application of a similar exception.64

(f) The duration of confidentiality obligations gives rise to certainproblems of legality. 66

64 Cf. also the clause under dispute in the case decided by the Tribunal de GrandeInstance of Quirnper on May 9,1986, Pum. Dr: Propr: Ind., 1986, p. 80.

65 Cf. supra, pp. 247-255.

66 Cf. infra, pp. 291-293.


6. Remedies

(a) It is rare to find confidentiality clauses that provide specific sanctions. This may result from the fact that the parties have not seen any needto provide particular remedies being satisfied with the sanctions providedby the law generally or those that the contract may have provided unspecifically. This lack may also reveal a certain skepticism as to the ability ofenforcing compliance with a confidentiality undertaking.

(b) Some clauses limit themselves to affirming the liability of the partyin default without providing any particular sanctions. In addition to theexamples already cited, here is another one:

"It is understood that you shall be responsible for any breach ofthese obligations by any of your officers, directors, employees orprofessional advisors."

(c) Some clauses, among the samples we studied, envisage neverthelessthe possibility of damages: 67

• "In the event of any breach of the secrecy provisions set forth inArticle 13.1 due to negligence, the party in breach shall indemnifythe other party for any loss or damage caused to such other partyduring the term of this Agreement."

• "En cas de non respect de ces clauses de confidentialite, la societese reserve Ie droit de reclamer des dommages et inten~~ts pour Ieprejudice subi."

• "Due to the economic value of these documents and informationin general and for you, I will indemnify you against any loss arisingout of the breach of this undertaking."

Such clauses may become very detailed:

"4.1A In the event that the Recipient becomes or is deemed tobecome in default of any of its obligations hereunder, theRecipient shall assume any and all responsibilities and liabilitiestherefore, and shall satisfy all claims and demands made arisingtherefrom whether made by the Company or by a third partyagainst the Recipient and/or the Company and indemnify theCompany from any and all cost, charge, expenses, damage and loss(reasonably) incurred or suffered by the Company together withany (reasonable) additional expenditures and from any and allclaims, damages, compensation and other liabilities for which theCompany may become legally liable contractually or otherwise.

67 On damages for breach of confidentiality, also see Ter Kah Leng & S. HS Leong,Contractual Protection of Business Confidence,journ. Bus. I~aw, 2002, pp. 513-538.


"4.1B It is recognised that the Proprietary Information is derivedfrom third parties in addition to the Company and that in theevent of a breach of this Agreement by the Recipient the Recipientmay be liable in damages to such third parties as well as to theCompany and/or to compensate the Company for any liability itmay have to such third parties for unauthorised disclosure of anypart of the Proprietary Information."

This clause seeks to cover the various hypothetical possibilities of actionand various types of damage. It does not, however, resolve the most delicateproblem, that of the calculation of loss. The damage resulting from abreach of secrecy is indeed very difficult to establish. fiR The following clauseentrusts this duty to arbitration:

"Toute violation de l'une quelconque des dispositions du presentaccord par B ou son personnel, donnera lieu a dommages etinterE~ts en faveur de A, ceux-ci etant fixes par voie d'arbitrage conformement au paragraphe 8 ci-apf(~~s."

Faced with this difficulty, the provision of a penalty clause is to be recommended,69 as in the following examples:

• "Fur jeden Fall der Zuwiderhandlung gegen die Verpflichtung inZiffer 2 unterwirft sich der Unterzeichnende einer sofort falligenVertragsstrafe in Hohe von DM ..."

• "In the event that a party should commit a breach of his undertaking under this Article, he shall be liable to pay to the other parties for each breach a penalty of two hundred and fifty thousandMexican Pesos ($250,000.00 Mex. Cy). provided always however

6S Cf. on this point G. Hertig, ap. cit., p. 223;]. Huet & F. Toubol, ap. cit., No. 35. Cf.the very interesting decision of the Tribunal de Grande Instance of Quimper of May 9,1986, already cited (Rev. Dr. Prapr. Ind., 1986,80). Researchers under contract had published the results of their work, in spite of a confidentiality clause. The tribunal namedan expert to determine whether the publication of the article had led to a disclosure aptto prevent the claimant from taking a patent, and, if so, to appraise the resulting loss.On the other hand, the tribunal considered as "purely hypothetical" the loss alleged byclaimant, namely that the publication could incite competitors to develop similar equipment, thus giving them a technological edge to the detriment of claimant's marketshare. In another case also referred to above (Paris, February 14, 1997,jur: Class. Per.,ed. gen.,jan. 7,1998,25, note B. FAGES), determination of the loss proved to be easy.Information concerning Princess Diana, which had been submitted under a confidentiality clause, was published in another periodical in spite of that undertaking. It happened that the victim had sold the information to that periodical where the publicationappeared, and that periodical, under the circumstances, greatly reduced the victim'sremuneration. Damages were granted for the amount of the loss.

69 Cf. G. Hertig, Of}. cil., p. 230;]. Huet & F. Toubol, Of}. cil., No. 35.


that the other parties may claim larger damages upon proof thatthe real injury was greater than the amount of such penalty."

This last clause has the inconvenience of putting in doubt the lumpsum character that normally applies to a penalty clause by permitting theproof of higher levels of damages.

Although the Group's sample did not include any examples, the payment of the amount arising under such penalty clauses might be ensuredby a cash deposit or a bank guarantee. 70

(d) Other clauses are more explicit as to the remedies available to sanction indiscretions. One notices, particularly, mention of the possibility ofobtaining an injunction from a court.

• "Without prejudice to the rights and remedies otherwise availableto you, you shall be entitled to equitable relief by way of injunctionif we or any of our Representatives breach or threaten to breachany of the provisions of this Agreement."

• "In the event I violate any terms of this Agreement it is understoodand agreed that such violation will cause immediate and irreparable harm to the Company for which there is no adequate remedyat law and that the Company shall be entitled to an injunctionissued by any competent court of equity, enjoining and restrainingme and each and every other person concerned therein from thecontinuation of said violation and the Company shall also be entitled to full compensation by me for any damages sustained by theCompany as a result of said violation and for any legal costs including reasonable attorney's fees incurred by the Company in obtaining same."

• "It is further understood and agreed that money damages wouldnot be a sufficient remedy for any breach of this Agreement andthat the Company shall be entitled to specific performance andinjunctive or other equitable relief as a remedy for any suchbreach. Such remedy shall not be deemed to be the exclusive remedy for breach of this Agreement but shall be in addition to allother remedies available at law or equity to the Company."

Clearly, these clauses are taken from the context of common law; onefinds in them various references to the remedies of equity. Analogous provisions, mutatis mutandis, could be found in civil law, providing for the possibility of acting en rifbi in order to end indiscretions (but is there any needfor an express clause to provide for such a remedy when it is already avail-

70 Cf. also G. Hertig, id., pp. 230-231.


able?), and other remedies such as, according to the circumstances, anaction for specific performance or for damages. An express terminationclause is also of value under legal systems that make termination for nonperformance a matter subject to a court decision.

One will appreciate the value of the different remedies availabledepending on the circumstances. An injunction to cease doing somethingonly makes sense if the indiscretion is not irremediable, and that thespread of the indiscretion can still be contained. Specific performance isconceivable when it is possible to take preventive measures; it has no placewhere the secret has already been divulged. Termination of the contract fornon-performance constitutes sometimes a cure worse than the evil.

(e) Confidentiality obligations are rarely accompanied by clauses forlimitation or exoneration of responsibility. An example has, however, beengiven above in connection with the responsibility of a company for theindiscretions committed by its own staff. 71

(f) It would not appear necessary to emphasize that the application ofsanctions presupposes the legality of the confidentiality clause itself. Oneshould remember that certain remedies may see their validity disputed orat least subjected to judicial control. 72

7. Limitation to the Scope of the Confidentiality Undertaking

The signing of a confidentiality agreement at the opening of negotiations should not create any ambiguity. The beneficiary may not be led tobelieve that this means the other party is committed to conclude a contract.Certain provisions attempt to prevent any misunderstanding:

"This agreement shall not by implication or otherwise be construed as a grant of or a claim to a license or an option for alicense. Neither shall it be construed as a claim to an exclusivityof negotiations, a contract relating to a collaboration, ajoint venture, a transfer of shares or any other arrangement. Each partyagrees that until a final agreement relating to the PURPOSE, neither ... nor ... shall be under any legal obligation and shall haveno liability to the other party of any nature whatsoever withrespect to the arrangements considered herein by virtue of thisAgreement or otherwise except as to the confidentiality and useof the INFORMATION."

71 Cf. SLlfJTfL, pp. 265-266.



III. FURTHER REFLECTIONS AND CRITICAL ANALYSIS

At the end of this detailed analysis of the various elements found in confidentiality clauses, a number of more general reflections will lead us to recallthat such clauses are present in a context where a duty of discretion isimposed by the law itself, by the very nature of the contract or by the application of general principles (Section lILA) and to reconsider more systematically the legal aspects of the transmission of data to third parties (SectionIILB). Then we shall examine the difficult questions of the legality of confidentiality clauses (Section IILC) and their effect on the production of documents in legal proceedings (Section IILD). Finally we will examine theeffectiveness of confidentiality clauses in practice (Section IILE).

A. Confidentiality Without Any Confidentiality Clause

Often confidentiality clauses provide a contractual basis for obligationsthat are already established by law, on the basis of legal texts, by the verynature of the contract or by the application of general principles. Thenational reports that follow the original report, published in 1991 in theInternational Business LawJournal, bear witness to this.

In systems as varied as those of Belgium,73 Germany,74 Romania,75England76 and the United States,77 laws provide penalties for the violationof manufacturing or professional secrets, of the secret character of correspondence or of certain financial information. By their very nature, certaincontracts require discretion concerning one of their basic elements, theidentity of one or several of the contracting parties. The agent must notreveal the name of his undisclosed principal, or the ostensible party, theidentity of the person for whom he is acting; in certain types of partnershipagreements (such as the French association en participation), the managermust remain silent as to the names of the participants.78 Certain principlesgive rise to obligations for discretion in particular circumstances: culpa incontrahendo,79 duty of good faith,SO existence of a confidential relationship,sl

73 M. Vanwijck & M.E De Pover, op. cit.

74 W. Kraft, Of}. cil.

75 O. Capatina, op. cit.

76 P. Ellington, op. cit.

77 R. Jillson, Of}. cil.

7S M. Vanwijck & M.A. De Pover, op. cit., p. 97; O. Capatina, op. cit., No. 11, whostresses the differences between commission and prete-nom; the rules on simulation applyin the latter case (ver. trad. en angl.!).

79 M. Vanwijck & M.A. De Pover, ibid., pp. 95-96.

so fd., p. 109; O. Capatina, op. cit., No.8.

81 R. Jillson, op. cit., pp. 149-150.


general sanctions for wilful acts and negligence,t;;2 etc.83

One must turn to the national reports cited in footnotes for a detaileddiscussion of these questions and the peculiarities and nuances inherent ineach legal system. Special attention should be paid to English case law. Insome cases involving former employers and persons subsequently workingfor new firms, it was necessary to establish to what extent the defendantsmight continue to utilize the knowledge they had acquired during theirprevious employment.84 These decisions have enabled Englishjudges, withtheir usual subtlety, to refine the concept of confidential information, andto focus on the difficulty for someone to distinguish between what heknows and may use and what he knows and may not use freely. The caseshighlight the close relationship that exists between the problems of confidentiality and non-use,85 creating the risk of transforming a secrecy clauseinto a clause restricting competition.

A recent development is worth mentioning. The Unidroit Principles ofInternational Commercial Contracts have recognized the existence of animplied confidentiality undertaking related to certain information provided in the course of negotiations: "Where information is given as confidential by one party in the course of negotiations, the other party is undera duty not to disclose that information or to use it improperly for its ownpurposes, whether or not a contract is subsequently concluded. Whereappropriate, the remedy for breach of that duty may include compensationbased on the benefit received by the other party" (Article 2.16).

A similar provision appears in the Principles of European Contract Law(Article 2.302).

B. Transfer to Third Parties: Legal Aspects

In some cases, the area for stipulating obligations resulting from confidentiality commitments is well defined: a person to whom information is

S2 W. Kraft, op. cit., pp. 137-138.

83 The Supreme Court of Canada has taken an important decision on the bases andremedies of implied confidentiality undertakings in International Corona &srnm;es v. LacMinerals, concerning revelations on the existence of an important gold deposit(Perspectives, vol. 2, issue 4)

81 IIivac Ltd. v. Park Royal Scientific Instruments Ltd. (1946) 1 All E.R. 350; Printers andFinishers Ltd. v. IIolloway (1964) 3 All E.R. 731; Litllewoods Organisation Ltd. v. IIaTTis(1978) 1 All E.R. 1026; Marshall (Thmnas)(Experts) Ltd. v. Guinle (1978) 3 All E.R. 193;Faccenda Chicken Ltd. v. Fowler and others (1986) 1 All E.R. 617. Compo Seager v. CopydexUd. (1967) 2 All E.R. 415, which does not concern a former employee, but a firm towhich an inventor had revealed one of its inventions. These decisions were submitted tothe Working Group by Mr. Ronald Fanants. Some of them are commented by P.Ellington, op. cit.

85 Cf. supra, pp. 232-233.


given promises the provider to keep the secret, not being authorized toshare it with anyone. An inventor may reveal his discovery to a firm with aview to commercial exploitation and undertake not to reveal it to anyoneelse. Financial data may be transmitted to a tax adviser who is not entitledto divulge them at all. It is clearly established in such cases who bears theburden of the obligation of confidentiality.

It is, however, common that the secret has to be and may be retransmitted to other parties by the initial beneficiary of the revelation. We haveseen confidentiality clauses that permit disclosure of the data to certainmembers of staff, to suppliers, to clients, to sub-contractors or to advisers. 8G

In such cases, more detailed reflection is required about the obligations ofeach person involved and their legal nature. Clauses found, in practice, arenot always very precise in this respect.87

To clarify the discussion, let us take a typical example and deal systematically with role allocation. Firm A has developed a process. By a licence contract concerning know-how it transmits the data, confidentially, to Firm L, thelicensee. The latter is authorized to communicate the date to its technicianT and its sub-contractor S. What are the effects of this arrangement?

(a) Initially L is personally bound in relation to A to keep the secret byreason of the confidentiality clause written into the licence contract underwhich it is the direct promissory.88

(b) The same clause authorizes the communication of the data to Tand S. Does this give rise to particular obligations of L in relation to A inthe event that Tor S are subsequently indiscreet?

L may expressly or implicitly undertake certain obligations relating tothe manner in which the data is transmitted to T and S: e.g., to limit therevelation to what is necessary, to give a warning of the confidential character of the information revealed, even to obtain a specific undertaking ofconfidentiality from the recipients. 89 L is clearly responsible towards A if hemakes disclosures without complying with these terms.

Once the data have been revealed, is L obliged to assure that T and Srespect the secret? As we have seen, confidentiality clauses often requirethis and make L personally responsible for indiscretions committed by

86 Cf. SU!JTCl, pp. 255-258.

87 This was already stated supra, pp. 264-270.

SS Cf. supra, pp. 264-266.

89 Cf. SU!JTCl, pp. 266--269.


third parties to whom the secret has been transmitted.90 Some clausesreduce the intensity of the obligations of L who may even be relieved of allresponsibility in certain circumstances.91

What is the basis of the liability of L towards A for acts of T or S? Someof the clauses quoted above provide that L guarantees the obligations ofthe third parties concerned (a formula that indicates an undertaking as"surety"), or that itobtains an undertaking from the third party (se portefort-in French) .92

Under the circumstances, the reference to a pTOmesse de porteforl is notvery adequate. A portefort, in French law at least,93 is one who undertakesto ensure that a third party enters into an obligation; it is to be distinguished from a "surety" in that, in the latter case, one is responsible for thenon-performance by a third party of an undertaking already created. Theportefort is released if and when the third party enters into an undertaking,while a "surety" (caution) obligation is created at that moment. In our context, L might se porterfort for the acceptance by T and S of their own obligations of confidentiality. But once these have been entered into, theportefort has no further responsibility. It would be more satisfactory if theclauses would have required a guarantee (caution) from L that T and Swould keep the information confidential. Such a "caution" would essentiallyguarantee the payment of damages awarded against T or S in case thesecret was divulged.

However that may be, L will often be responsible, in relation to he contracting party A, for breaches by the person to whom he has delegated performance, S, and, a fortiori, by his employee, T, on the basis of generalprinciples covering responsibility for the acts of a third party. One willclearly need to check the rules under the applicable law, in particular as tothe possibilities that might exist for L to be released from this responsibility (e.g., because it had taken all the precautions required, as envisaged bya contract clause cited above91 ).

(c) Let us look now at the responsibility ofT and S as to the confidentiality of the information that they have received.

90 Cf. sUfJr(J" pp. 265-266.

91 Cf. supra, pp. 266-269.

92 Cf. supra, p. 265.

9:> Art. 1120 of the Civil Code. On the matter in Romanian law, d. O. Capatina, Of).cit., No.6.

91 Cf. supra, pp. 265-266.


The first question is to determine who is liable: L or to A? As we haveemphasized above,95 clauses are not always precise as to this fundamentalpoint. It is necessary to know who may bring proceedings against Tor S inthe event of indiscretion.

Is T held to secrecy in relation to L? If the information has been givento him ill-advisedly, without its confidential character being self-evident orwithout being alerted to it, T apparently is not subject to any obligation. Inthe opposite case, but without any express confidentiality clause, T may bebound to secrecy under legislation on the protection of industrial secrets,or even by a general secrecy clause written into his employment contractrelating to confidential information that he might obtain during hisemployment.96 As to S, his liability for confidentiality in relation to L, in theabsence of any clause, may be deduced from certain principles, for example, in French law, that of good faith performance of agreements.

If S or T are required to enter into specific undertakings of confidentiality in the matter, it will be necessary to check whether the undertakingsare at least partially for the benefit of L. As we have said, such engagementsare often silent or imprecise as to the identity of the promissee or promissees of such obligations.97

Are T and S bound to secrecy in relation to A, assuming that they wereinformed of the confidential nature of the information?

Without any explicit undertaking on their part in relation to A, T andS are third parties in relation to A and their responsibility, in the event ofindiscretion, could only be tortuous. 98 On the other hand, if they wererequired to enter a specific confidentiality obligation they will be contractually bound in relation to A in two circumstances: firstly, if the undertaking is given directly to A or, secondly, if it is given to L but with thedesignation of A as a third-party beneficiary (as has been discussedabove99)-at least in those legal systems that honor such provisions.

(d) Very different is the situation of a third party, X, to whom the confidentiality clause in the contract between A and L did not authorize disclosure.

95 Cf. supra, pp. 267-269.

96 Cf. SU!JTCl, pp. 264, 266-267.

97 Cf. supra, p. 267.

98 Certain legal systems may have specific solutions. See the way French case law haddeveloped about groups of contracts (Cass. civ., 21 juin 1988, Dalt. Sir., 1989,5, noteLarroumet; but d. Casso civ., 12juillet 1991, DaB. Sir., 1991,549, note]. Ghestin), andthe Belgian case law on immunity of agents (Cass., 7 elee. 1973, Pas., 1974, I, 376).

99 Cf. supra, p. 267.


If this third party gets hold of the secret by fraudulent means, forexample, spying, it can become liable in tort both to Land A.

If it obtains the information in question by causing L to reveal it inbreach of the confidentiality obligation entered into by the latter, the possible exposure of X in relation to A may be covered by what certain legalsystems call third-party complicity (tierce-complicitej or intentional interferencein contractual relations. For tortious responsibility of X to arise, it is at leastnecessary that he should have known of the existence of the secrecyclause to whose breach by A his actions have led; some national lawsrequire additionally that X should have induced L to break his contractual 0 bligati0 ns. 100

(e) This brief review shows the complexity of the legal effect when asecret is transmitted to third parties. Negotiators must be extremely careful in the drafting both of clauses directly binding the original promisseeto confidentiality and those that are to be entered into by third parties towhom the initial recipient has permission to disclose information.

C. Legality of Confidentiality Clauses

Freedom of contract necessarily implies a freedom in principle to createconfidentiality clauses. In many cases the law itself forbids indiscretion. lOI

There exist, however, some circumstances in which an obligation ofconfidentiality becomes illegal.

A first example occurs when the secret is intended to hide practicesthat are themselves illegal. Enterprises may agree on prices or on marketsharing contrary to the laws about competition.102 A company director mayundertake to provide information to third parties in breach of the rulesrestricting insiders (insider trading) .103

100 Cf. M. Waelbroeck, Les conditions de la responsabilite du tiers complice de la violation d'une obligation contractuelle, en droit beIge et en droit compare, note underPres. Bruxelles, March 22, 1962, &v. erit. .fur: B., 1962, pp. 326--358.

101 Cf. supra, pp. 286-287.

102 On the dangers of a policy of secrecy in such context, cf. G. Virassamy, op. cit., pp.206-207, and the cited references.

103 But agreements concerning certain financial operations often contain a confidentiality clause aimed at preventing insider trading. Here is an example: "You herebyacknowledge that you are aware ... that the United States securities laws prohibit anyperson who has received from an issuer material, non-public information concerningthe matters which are the subject of this letter from purchasing or selling securities ofsuch issuer or from communicating such information to any other person under circumstances in which it is reasonably foreseeable that such person is likely to purchaseor sell such securities."


Confidentiality clauses relating to the existence of such agreements areclearly void as are the agreements themselves.

Another situation occurs when the secrecy undertaking tends to prevent revelations to authorities who, by law, are entitled to require disclosureof certain information. The information protected may not have connections to illegal acts, as in the first instance, but its disclosure may be such asto cause higher taxation, to make public a hidden business relationship orto undermine the claims of one party in a law suit. In such cases, a secrecyundertaking is generally illegal because of the obligation to inform theauthorities is mandatory, and is indeed often reinforced by penal sanctions. I04 Some members of the group even cast doubt on the legality of thestraightforward obligation to warn one's partner in the event of a demandfor information on the part of the authorities. lOS

A confidentiality clause may also be illegal insofar as it sometimes constitutes a restriction on competition. This is the case, particularly, for secrecypledges that extend beyond the life of the contract, where they will preventthe promissee from continuing his activities in the specific business sector.

In truth, it is not the maintenance of the secret itself that is likely torestrict competition. That the person who has received confidential information is obliged not to reveal it to third parties, even a very long time afterthe expiry of the contract (on condition that the data has not fallen intothe public domain), does not, in any way, change the conditions of competition. lo6

The problem arises from the frequent linking of the obligation ofsecrecy to an obligation of non-use. The contract provides that after expiry,the knowledge transmitted shall remain confidential, but furthermore, thatit shall no longer be used. In certain cases, this combination can paralyzethe future activity of the promissee, or at least oblige him to implementfundamental changes. Thus, we arrive at non-competition clauses whoselegality is subject to various restrictions in different countries. I07

104 Cf. SU!JTCl, pp. 258-262.

105 Cf. supra, p. 261.

106 EEC Regulation No. 240/96 ofJanuary 31, 1996 concerning the application ofArticle 85, paragraph 3 of the Treaty of Rome (now Article 81,30

) to categories of transfer of technology agreements even put at the head of its list of clauses presumed to benon-restrictive "an obligation on the licensee not to divulge the know-how communicated by the licensor"; the text added that "the licensee may be held to this obligationafter the agreement has expired" (Art. 2, 1, 1). This Regulation is now superseded byEEC Regulation No. 772/2004 ofApril 27, 2004, which does not contain such an explicitprovision any more.

107 Cf. e.g., J.L. Bergel, Les clauses de non-concurrence en droit positif fran<;:ais,


Not all circumstances are the same. Particular attention is directed toex-employees forbidden to continue to use certain knowledge acquired inthe service of their former employer. lOS

It is not possible, within the limits of the present study, to consider, inmore detail, the various aspects of the legality of confidentiality clauses.Draftsmen, however, need to check the validity of the clause they prepareaccording to the law applicable.

If the confidentiality clause is illegal, clearly it cannot be the subject ofany proceedings in the event of breach, seeking, for example, to obtain aninjunction or damages. This result, which is self-evident, is made explicit inthe following clause:

"It is understood that the Recipient shall be bound to enforce suchundertaking of secrecy and employment only to the extent permissible under the laws of (Country X)."

Indeed, compliance with such a clause may, in certain cases, subject theparties to penalties.

D. Confidentiality Clauses and Disclosure Under Legal Procedure

What are the effects of such a contractual obligation to secrecy on theneed to produce information in legal proceedings? In particular, what happens if the court requires the disclosure of information that is subject tosuch a clause? What are the consequences if one of the parties, voluntarily,produces confidential information to assist its defense?

A study made for the Group byJ. Milquet provides part of the answerto these questions. 109 The author makes a series of relevant distinctions. Inthe absence of case law concerning the effect of confidentiality clauses insuch circumstances, an answer must be developed from comparison withthe analogous situation of banking secrecy.

Eludes (![!erles r2 A . .Jau[frel, pp. 21-62; Y Serra, La non-wru;urreru;e en maliere wrmnen:iale,sociale et civile: droit interne et droit conliffliunautaire, Paris, 1991, 337 pp.

lOR On this, cf. P. Ellington, op. cit., p. 141 and the English cases cited.

As concerns transfer of technology agreements, the EEC Regulation No. 240/96 ofJanuary 31, 1996 mentioned above, no longer in force, listed among the permitted obligations "an obligation on the licensee not to exploit the licensed know-how or patentsafter termination of the agreement in so far as and as long as the know-how remainssecret or the patents are still in force" (Art. 2.1.3).

109 J. Milquet, La production enjustice, par un cocontractant, de renseignements etde documents proteges par une clause de confidentialite, Rev. Dr. AJI Int., 1991, pp.153-166.


From this analysis and the discussions that the Group devoted to thistopic, it would appear llO that a confidentiality clause cannot prevent therevelation of information in legal proceedings where the party concernedis required to do so (for example by means of a request for discovery, or toproduce documents) .111 In such a case, its enforced disclosure should notentail contractual responsibility to the promissee, the violation of the secretbeing justified by "Act of Prince" or by the public interest. The party soobliged, nevertheless, assumes certain obligations. Firstly, it should seek toobtain a derogation from the obligation to reveal the information soughtwhere such dispensation is possible (the rules requiring obligatory presentation of information in court proceedings sometimes admit such exceptions).112 It should no doubt warn the other contracting party of therequest so that the latter might take appropriate action. 113 It is obliged tolimit the disclosure to the strict minimum.

On the other hand, if the promissor of a confidentiality obligation isnot required by the court to produce the information in question, butwishes to do so of his own volition, in order to assist his defense against athird party, II'! such disclosure would no doubt constitute a contractualbreach and involve responsibility to the promissee.

These conclusions might be influenced by the existence of means torestrict disclosure of the information revealed in court proceedings. Someprocedures are public, others more or less confidential. There is sometimesa possibility of restricting disclosure of documents to the judge alone, or tohave them examined by a third party, for example, a court-appointedexpert, the judge as well as the expert being themselves subject to a pro-

110 We can only submit principles of solution, the application of which will have to bemade case by case according to the peculiarities of the applicable law.

IlIOn the lifting of business secrets before courts under French law, d. B. Bouloc,op. cit., pp. 29-32.

112 Cf. e.g., the recognition of a right to secrecy concerning communications betweencounsel and client (d. Court ofJustice of the European Communities, May 18, 1982,E.C.R, 1982, 1616; E. Alexander, La correspondance de l'avocat. Confidentialite etsecret professionnel. Suite et non fin, Gaz. Pal., Doctr., 1998, No.4, pp. 873-874). TheBelgian law of March 1,2000 recognizes the confidential character of the opinions givenby corporate counsels to their employers, within the scope of their counseling activities;this is far from being true in other countries.

113 It will be recalled that some members of the Group had reservations on this point.In certain cases, the obligation to warn the other party may be of dubious validity, if itseffect can hinder the ongoing proceedings (d. supra, p. 261).

114 If the procedure includes opposing the parties, the confidence is already shared,but public debate may run the risk of divulging information to third parties. The possible liability of the author of the revelation will probably be affected by the parties'respective responsibilities in their dispute.


fessional obligation of secrecy. The party bound by a confidentiality obligation should seek to apply such procedures where available.

We cited several clauses relating to the forced presentation of information in the course ofjudicial or administrative procedures. lIS These provisions appear extremely useful as they address the duty of the parties insuch circumstances and they seek to avoid dispute as to the possible liability of a party obliged to make such a disclosure.

Apart from any contentious proceedings, revelation of confidentialinformation may also be required by public authorities. The clauses citedabove recognizing this possibility1I6 are less detailed than those referring torevealing information in court proceedings. This is regrettable, because theproblems are similar and deserve similar attention. 1I7

E. Effectiveness of Confidentiality Clauses

Are confidentiality clauses effective? Considerable skepticism was sometimes expressed at meetings of the Working Group. King Midas, in spite ofthe secrecy obligation imposed on his barber, was not able to prevent thewind from spreading the news of his ass's ears. Many companies, despitefinely crafted clauses, will not succeed in avoiding the leaking of confidential information.

A secret is volatile, and its keeping is accompanied almost inevitably bythe temptation to enlarge the circle of those knowing it. The temptationbecomes quickly irresistible when the information has economic value. Aconfidentiality clause is difficult to enforce because it runs contrary to astrong natural tendency.

This analysis of the drafting of these clauses has furthermore shown theexistence of problems at all levels, which tend to undermine the safety ofthe secret. One first needs to define the subject matter of the confidentiality, which is difficult to do with precision. Exceptions must be recognized for knowledge within the public domain, or already in the possessionof the contracting party, or communicated to it by a third party. Theseexceptions give rise to problems of proof. One has to accept the secret maybe shared with other people, often a great many, whose participation isindispensable; these persons must also be held to secrecy, but the risk ofdisclosure is clearly multiplied. One may seek to reinforce the confiden-

m Cf. supra, pp. 258-261.

116 Cf. supra, pp. 258-259.

117 On cases where a business secret is lifted to the benefit of public administrationunder French law, d. B. Bouloc, op. cit., pp. 32-40.


tiality obligation by prescribing precise steps to be taken for the protectionof secrecy, but how is one to control the use of copies, to police computernetworks or to enforce total compliance with an obligation to return documents at the end of a contract? As for remedies, we have seen their limitations. An injunction will often come too late, and problems of proof willmake it difficult to obtain adequate damages.

Certainly, the extent of the probable effectiveness of a confidentialityundertaking depends on the circumstances. Between enterprises that aremutually interested in the maintenance of secrecy, where the secret is welldefined (such as a technical process) and where it is not to be shared withtoo many others, a clause has a good chance of being complied with. Thechances diminish as the identification of the information to be protectedbecomes less precise (e.g., "all financial or commercial information") andin proportion to the number of people having access to it.

Maintenance of a secret may be particularly difficult among groups ofcompanies, or even with an enterprise having several widely diversifiedbranches. How can one stop information from filtering through to subsidiaries or from being revealed to third parties? How can one prevent thebanking department of a company from divulging confidential informationto the investment division? In the event of litigation, would it not be possible to claim that the subsidiary or the branch accused had already receivedthe information from other sources? Difficulties in keeping a secret in thecase of a transfer of an enterprise have also been touched upon.

The identity of the party on whom the confidentiality obligation isimposed is also important. It is scarcely realistic to count on the future discretion of a foreign trainee after his return to his own country. A universityspecialist, undertaking research for an enterprise, may not be very sensitiveto the secret character of his discoveries and may wish to publish them inscientific journals. The presence of integrated research groups within certain firms tends to make a confidentiality obligation, obtained from themin the course of negotiations concerning a transfer of technology, quite illusory: thanks to the means of access to information currently available, thesegroups will often have no difficulty in re-constructing the whole processfrom fragmentary information already obtained.

These reasons for doubting the effectiveness of secrecy obligationsresult in the use of weak expressions to define the intensity of the obligation and in the frequent omission of any reference to specific remedies.

One should, therefore, not entertain too many illusions. That said,such clauses are nevertheless not absolutely useless and even greater importance attaches to drafting them better.



Whatever the doubts just expressed, a clause that is well-drafted and welladapted to its circumstances has more chance of being effective than a lessperfect clause. From this study emerged a few practical recommendations.

1. A confidentiality clause must be adequately developed. A stipulation that is too laconic and expressed too broadly risks not beingrespected and causes difficulties in its application by reason of itsgaps; it may have, for example, omitted providing an exception forinformation being in the public domain or the terms on which thedata may be revealed to others during the course of performance.In contrast, here as elsewhere, the best is the enemy of the good.A perfectionist clause, bearing all the wrinkles mentioned in ouranalysis, would often risk being ill-adapted to the situation of thepartiesllS-even supposing it were possible to get it accepted innegotiation. One must decide, case by case, which elements toinclude in the secrecy clause.

2. Against this background, one should take the following measuresas appropriate:• The material subject to confidentiality should be defined as

precisely as possible. It should be possible to identify, withoutany further debate, which information is subject to secrecy.One should avoid vague or pleonastic expressions in favor ofobjectively justifiable phrases. A certain formality is usefulwhenever possible (marking specific documents "confidential," etc.).

• Excessive use of confidentiality must be avoided. An obligationto secrecy loses its impact and thereby its effectiveness whenthe character of secret is branded on every piece of routineinformation.

• A person who receives information should be careful not to beunjustifiably put into a straightjacket of secrecy. He will resistarrangements under which the confidential character of information is to be determined unilaterally by the other contractingparty. In certain cases, he will insist on the ability to refuse toacquire certain information presented to him as confidential.

• A secrecy clause should not fail to make an exception for certain types of information, in particular that which is within thepublic domain, that which is already available to the other contracting party and that which is transmitted to it lawfully by a

118 In this respect, attention must be given to the main direction of the stream ofinformation between partners, as well as to the manner in which the other party ismanaged.


third party. The notion of "public domain" should, whereappropriate, be further clarified. The recipient of data shouldtake adequate steps to be able to prove prior knowledge, e.g.,by lodging, in good time with an independent third party, a listof the data already in his possession.

• The need to make information available to others should beconsidered in appropriate ways. This aspect of the clausedeserves particular care. One should specify as precisely aspossible the relevant third parties and the extent and purpose of the information that should be given to them. Thesepersons in turn should probably be required to enter into aconfidentiality obligation, but the obligation should be clearas to who should benefit. If one must bear personal liabilityfor indiscretions committed by those third parties, one willtake care to precisely define the intensity of the corresponding obligations. One should consider how to deal with theneed to reveal the confidential information to some administrative authority or to produce it in a law suit, or alsowhether one of the parties will wish to publish the information for scientific or other purposes.

• The possibility of transfer of the promissor's business or of achange in its control should not be ignored. The provider ofinformation will try to protect himself as best as he can againstthe leakage of information, perhaps by reserving the right toterminate the contract in such circumstances.

• Some specific protective steps for the data should be considered, in particular as concerns the place of safe-keeping, questions about copies or the restitution or destruction ofdocuments at the end of the contract.

• The duration of the confidentiality obligation should be specified, always remembering that such obligations should oftenbe continued beyond the termination of the contract. Oneshould consider, however, the legality of such steps accordingto the relevant applicable law.

• Particular attention should be paid to remedies, always bearing in mind the difficulty of enforcement. A penalty clausemay give additional effect to a confidentiality agreement, ifappropriately accompanied by a deposit or bank guarantee.

3. In order to field any questions or help with the interpretation thatmight arise, it is to be recommended that the reasons and purposes for the transmission of data be set out in the clause itself,perhaps also in the recitals to the contract.

CHAPTER 6

PENALTY CLAUSES

I. INTRODUCTION

Penalty clauses are extremely common in international contracts. TheWorking Group was able, without any difficulty, to find a sample of over 100of them, taken from very different types of contracts: many contracts forthe construction of factories or other types of works, but also contracts forservices, supply contracts, counter-trade contracts, loan contracts, licensingagreelnents, etc.

The subject seems perennial, but it has jumped back into the limelightin the recent past. In some countries, the legislation governing penaltyclauses has been amended (in France and Belgium, for example) or therehave been changes in the case law. There was a Benelux Convention onpenalty clauses (never ratified), and a Council of Europe Resolution. TheU.N. Commission on International Trade Law (UNCITRAL) has drawn upuniform rules on such clauses. The International Chamber of Commercehas published a practical guide on penalty and liquidated damages clauses.!Specific provisions are devoted to them in both the Unidroit Principles onInternational Commercial Contracts (Article 7.4.13) and in the Principlesof European Contract Law (Article 9:509). Generally speaking, a study ofpenalty clauses in comparative law has much to teach us.2

1 Guide to Penalty and Liquidated Damages Clauses, International Chamber ofCommerce, Publication No. 478, Paris, 1990,51 pp.

2 For penalty clauses in comparative law, see P. Benjamin, Penalties, LiquidatedDamages and Penalty Clauses in Commercial Contracts: A Comparative Study of Englishand Continental Law, 9 Int. Compo LQ 1960, pp. 600-627; H. Nial, Les clauses penalesdans les contrats de vente internationaux, in Eludes juxidiqu,es offerles r2.r .fulliol de laMurandiere, Paris, 1964, pp. 417-420; T. Segre, Clause penale et dommages ulterieurs endroit compare, Pum. Int. nr; Comp, 1970, pp. 299-311; Council of Europe, Clauses penalesen droit civil, 3 vols of 91, 15 and 14 pp., 1972; G. Treitel, Remedies for Breach ofContract, Int. Hncycl. ofComp. I~aw, 1976, Vol. VII, Chapter. 16, Nos. 120-136;]. Thilmany,Fonctions et revisibilite des clauses penales en droit compare, Rev. Inl. Dr; CmnfJ. 1980,pp. 17-54; P. Karrer, Liquidated Damages and Penalty Clauses-A Comparative Study, 1The Int. Contract, 1980, pp. 225-230; D. Fischer, Vertragsstrafe und vertraglicheSchadensersatzpauschalierung, 1981, 197 pp.; P. Murray, Comparative Analysis of LiquidatedDamages and Penalty Clauses, 2, The Int. Contract, 1981, pp. 353-358; G. Bucksch,Rechtsvergleich zu Vertragsstrafe und/oder pauschaliertem Schaderersatz, R.I. W 1984,pp. 778-782; F. Loksaier, La clause penale dans les contrats internes et dans les contratsinternationaux, Lausanne, 1985,207 pp.; D.L.Jaffe & K.B.Jaffe, Stipulated Damage Provisions

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Moreover, in this area as in others, systematic analysis of clauses draftedby international trade law practitioners is very fruitful owing to the diversity and originality of the techniques it reveals.

The first task is to define the subject and adopt a terminology. A priori,a penalty clause can be defined as one stipulating payment of a sum ofmoney in the event of non-performance of a contractual obligation, with apurpose either of pure indemnification or of deterrence.3 The great majority of the clauses considered by the Group come within this definition.However, occasionally, as we shall see, some of the clauses considered strayfrom it.4 Furthermore, we will seek to establish the differences betweenpenalty clauses and certain similar provisions, such as judicial penalties(astreintes) or withdrawal payments (clauses de dedit). 5

in France and in the United States, 33 Amer. j. oj Compo I"aw, 1985, pp. 637-672; D.Mazeaud, La notion de dause !J/;nale, Paris, L.G.DJ., 1992; U. Draetta, Les clauses penaleset les penalites dans la pratique du commerce international, I.B.L:J, 1992, pp. 635 etseq.; U. Mattei, The Comparative Law and Economics of Penalty Clauses in Contracts,A mer. Journ. oj Comp. I"aw, 1995, pp. 427 et seq.; B. Eggleston, I"iquidated Damages andHxtensions oJ Tirne, Londres, Blackwell, 1997; E. MacDonald, Hxemption Clauses and UnfairTerms, Londres, Butterworths, 1999, 297 pp.; K.P. Berger, Vertragsstrafen undSchadenspauschalierungen im internationalen Wirtschaftsvertragsrecht, R.I. W. 1999, pp.401-411; H. Schelhaas, Waarheen met het boetebeding in Europa? Een analyse van hetEngelse, Schotse, Belgische en Nederlandse recht en de Principles of European ContractLaw, Tijdschr: voorPrivaatr~, 2000, pp. 1371-1443; A. Pinto-Monteiro, La clause penale enEurope, in Le contraJ aLl debut du XXIieme siede, Etudes orrerIes r2.Jacques Ghestin, Paris,L.G.DJ., 2001, pp. 719-746.; Y Rabier, Liquidated Damages in International Contractsfor the Construction of Electric Power Stations, I.B.LJ, 2003, pp. 157-169; L. Miller,Penalty Clauses in England and in France-A Comparative Study, Int. Compo LQ., 2004,pp.79-106.

See also a series of studies drawn up by members of the working group: H. GrigeraNaon, La clause penale en droit argentin, D.P.C.I., 1982, pp. 443-445;]. Thilmany, Laclause penale en droit beIge, id., pp. 447-462; D. Fran~on, La clause penale en droitfran~ais, id., pp. 481-490; G. Schiavoni, La clause penale en droit italien, id., pp.491-492; M. Strauch, La clause penale en droit allemand, id., pp. 499-506; L. ArentzHansen, International Contracts-Penalty Clause According to Norwegian Law,id., pp.493-497; B. Cremades, La clause penale en Espagne et en Amerique Latine, id., pp.463-481; P. Ellington, Penalty Clauses in English Law, id., pp. 507-514; B. Hanotiau, Laclause penale en droit americain, irl., pp. 515-524.

3 The problem of defining penalty clauses will be taken up again infra, pp. 335-341,when they will be compared to certain similar provisions.

4 Cf. infra, pp. 310-311 and 326.

Cf.in/ra, pp. 335-341.

Penalty clauses also have to be distinguished from "punitive damages" which can beawarded by courts in some legal systems, but which will not be considered here; d. B.Cremades, Liquidated Damages, Penalty Clauses and Punitive Damages withinInternational Contracts, I.B.LJ, 2002, pp. 329-345.

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Penalty Clauses • 301

As regards terminology, the expression "penalty clause," in its broadmeaning, will be used in this chapter, for reasons of simplicity. However,one shall be alert to the fact that certain legal systems use different expressions depending on whether the purpose of the clause is to indemnity orto punish. In English law, for example, the expression "liquidated damages" refers to clauses of the former kind, while "penalty" is used in the latter case. The distinction is important in common law countries, as penaltiesare considered as void while there is no doubt about the validity of liquidated damages clauses.

In the first part of the chapter (Section II), we will set out the mainfindings emerging from our analysis of the sample of clauses under consideration. In the second part (Section III), we will share some thoughts,first of all on the practice relating to penalty clauses in international contracts (by comparing in particular the group's observations and those ofUNCITRAL) and on the main legal problems encountered in practice.

II. PRACTICE

A. Analysis

There are three possible ways of setting out the analysis. First, clausescan be considered according to the type of contract from which they aretaken (for example, penalty clauses in contracts for sale, construction contracts, loan agreements, licensing agreements, etc.). Secondly, they can beclassified according to the type of breached obligation that they seek topenalize (for example, clauses penalizing delay, failure to supply, inadequate performance, the breach of an undertaking not to resell, etc.).Thirdly, the different technical aspects of the clauses considered can beclassified (for example, problems with the basis of calculation, rates to beapplied, exempt amounts, arrangements for payment, etc.).

The second criterion appeared to be the one most likely to illustratewith clarity the practice dealing with penalty clauses in international contracts, and thus it is the one we chose. There are more similarities andshared particular characteristics among penalty clauses penalizing breachesof the same obligation, for example late performance, in different types ofcontract, than among penalty clauses included within the same contract,but penalizing breaches of different obligations. As for the third possibility, if we had adopted it, the minute dissection of clauses would not haverevealed the sometimes very complex systems set up by those drafting thecontracts.

Therefore, it is mainly according to the type of obligation to which thepenalty clauses relates that our analysis will proceed. The two other criteria cannot, however, be totally disregarded. First of all, they will reappear

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when we look at any sub-classifications; and they will be referred to againon several occasions in the latter part of our study.

We shall look in succession at clauses penalizing delay, inadequate performance, failure to supply, breach of an undertaking to purchase, failureto defend industrial property rights and failure to comply with certainundertakings to refrain from acting.

1. Late Performance

Failure of the duty to perform the contract on time is probably themost commonly penalized offense. It seems that this is systematically thecase in building contracts, but such clauses are also frequently found inother types of agreements.

(a) Construction Contracts. Clauses penalizing late performance areextremely common in construction contracts, where they achieve the highest degree of sophistication.6

1. Hypothesis-Imputability. The hypothesis is one of delay in performance with respect to contractual obligations:

• "If the contractor fails to complete the construction supply, erection, operation, maintenance or any of them within this periodstipulated in Article Twenty-Two of these conditions, or within theperiod fixed ..."

• "If the contractor should fail to complete and deliver the Worksand/or to render and accomplish the Services in full on the specified Dates of Completion of each contractual Task ..."

The clause sometimes specifies that the late performance must beimputable to the party under the duty to perform:

• "Pour tout retard imputable au constructeur dans l'achevementdes travaux d'infrastructure du complexe industriel tel qu'il estprevu au planning contractuel de realisation figurant al'annexe Gaux presentes ..."

• "In the event that, except for reasons due to K or to force majeure,or other similar events beyond the control of A, the beginning ofreception tests is delayed beyond the contractual delivery date ..."

The following clause highlights the need for a causal link between theevent allegedly constituting force majeur-e and its exculpatory effect:

6 On this point, see also the study carried out by Th. De Galanl, Les penalities deretard dans les contrats internationaux de construction, I.B.LJ, 1986, pp. 131-143.

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"Les penalites de retard ne seront pas appliquees dans les cas deforce majeure. Le cas de force majeure est seulement admisdans l'eventualite d'une repercussion obligatoire sur les delaisde fourniture."

Another clause does not merely exonerate the builder in the event oflate performance imputable to the client; it makes the client, in such acase, liable to the builder, which is a mere restatement of the normal legalsolution:

"Toutefois si un retard dans l'achevement de la mission du constructeur telle qu'elle est prevue au Planning Contractuel deRealisation etait imputable exclusivement a M.O. et creait unprejudice direct pour Ie constructeur, M.O. indemniserait Ie constructeur pour Ie prejudice direct qu'il aurait subi."

Clearly this last clause is not a penalty clause, since it does not specifythe amount of compensation in advance.

However, certain provisions are very harsh on the builder. In the following example, taken from the general conditions of the Egyptian railways, it is interesting to note the discretion that the client reserves forhimself, both as to the nature of the underlying event and its effects:

"If it is proved to the satisfaction of the Organization, whose decision will be final, that the whole or the part of the delay arises fromcauses of "Force Majeure" such as strikes, shipwrecks ... etc, theOrganization may waive the right to enforce the penalty in wholeor in part."

If the indemnity for late performance clause is silent on the question ofimputability, the answer is probably to refer either to the solutions offered bythe ordinary law applicable to the contract,7 or to the provisions of the contract that cover exemption clauses generally.8 The following clause seems topenalize the supplier "whatever the reason for the late performance," but itdoes not rule out force majeure in actual fact it makes an express reference toArticle 2.4 of the contract, which provides for an extension of the time limits, without compensation, in the event of fora majeure:

"En cas de depassement des delais contractuels fixes dans IeMarche ou proroges dans les conditions prevues a l'article 2.4, Iefournisseur est passible de penalites, quelle que soit la cause du

7 On that point, it is worth noting that in certain legal systems, in particular undercommon law, contractual liability is interpreted much more strictly than in others.

8 On this point, d. Chapter 8, on pm:e rnajeLlrC clauses.

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retard et sans qu'il soit besoin d'aucune notification prealable, laseule echeance du terme Ie constituant en demeure."

2. Differentiated Clauses. Some contracts include a set of clauses penalizing, in various ways, a contractor's late performance in carrying out hisvarious obligations:

"14.1. Dedommagements pour retards dans la fourniture des documentations ...

"14.2. Penalites pour Ie retard de livraison des machines, du montage et de la reception ...

"14.3. Penalites pour Ie retard de livraison des pieces de rechange ...

"14.4. Penalites pour Ie retard des delais de livraison pour la suppression de defauts ..."

3. Exclusions. Sometimes the contract excludes any compensation forlate performance in case of specific obligations:

"The supplies made free of charge by ... by virtue ofArticle 3, par. 5,and Articles 12 and 13 shall not be subject to penalties for delay."

4. Grace Period. Provision may be made for a grace period:

• " al'issue d'une periode de grace initiale de soixantejours ..."• " after a grace period of two weeks ..."

But what is the position once the grace period has expired? Shouldcompensation be calculated from the initial time limit, or only from theexpiry of the grace period? The drafters of clauses do not always considerthis alternative, and some forms of wording may lead to serious problemsof interpretation. This is not the case for the following clauses, which setout their position explicitly, albeit in two different ways:

• "Mter the grace period, the delay taken into account for penaltycalculation will start from contractual delivery date."

• "Un pour cent du prix des travaux d'infrastructure par mois deretard imputable au constructeur pour chacun des deux premiersmois de retard al'issue d'une periode de grace initiale de soixante(60) jours."

5. Amount of the Penalty. The penalty usually consists of the payment ofa certain sum or a percentage of the price, per period of late performance:

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• "Pour non-respect des delais garantis a l'article 10, A paiera aB10.000 par semaine entiere de retard pour chaque section."

• "... A shall pay ... liquidated damages at the rate of one per cent(1 %) of the contractual price per week of delay ..."

The penalty may increase if the delay persists:

"... un pour cent du prix des travaux d'infrastructure par mois deretard imputable au constructeur pour chacun des deux premiersmois de retard;

"deux pour cent du prix susvise par mois supplementaire de retardimputable au constructeur."

6. Basis of Calculation. The basis of calculation for working out the percentage of the penalty often leads to interesting arrangements.

This basis may be strictly defined, limiting it to the part of the worksthat are behind schedule:

• "Au cas OU la date d'achevement des travaux ne serait pas respectee par suite d'une faute du fournisseur, Ie client pourra, pourautant qu'il prouve avoir subi un dommage, exiger pour chaquesemaine de retard une indemnite de 0,50% avec un maximum de5% de la valeur de la partie des travaux de montage non terminesdans les delais fixes."

• "En cas de retard dans l'execution des travaux, qu'il s'agisse del'ensemble du marche ou d'une tranche pour laquelle un deIaid' execution partiel ou une date limite a ete fixe, il est applique ...une penalitejournaliere de 1/3000 du montant de l'ensemble dumarche ou de la tranche consideree."

A consulting engineer will often seek to limit his liability according notto the value of the works, but to the amount of his fees:

"En cas de retard dans la mise en route de l'unite qui seraitimputable al'Ingenieur, sa responsabilite financiere est fixee contractuellement a1% du montant des honoraires tels qu'ils resultent de l'article XI, 1 et 3, par quinzaine de retard par rapport audelai prevu au premier alinea de l'article IX."9

9 Such limitations on liability are sometimes in breach of professional rules (seeRule 15,14 of the Rules of the Association of Consulting Engineers, as regards works carriedout in the United Kingdom), or even of mandatory legislation regarding the liability ofarchitects and building contractors (in particular in certain Arab countries).

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In a contract for the construction of a factory in Algeria, the basis forcalculating the penalties used the value of the equipment as a referencepoint:

"L'assiette des penalites de retard dans la realisation des operationsde montage ou de realisation des performances contractuelles estcalculee sur base de la valeur globale des materiels et pieces derechange Cif-Port-Algerien."

The following clause taken from another contract, concluded withAlgeria, contains a novel variation:

"Au cas ml, a la suite d'un retard de la part du constructeur dansla remise des specifications et donnees necessaires a la passationdes commandes ou dans la preparation des appels d'offre dans Iecadre des articles IV, V et VIII ci-dessus, M.O. serait contraint, afinde respecter Ie Planning Contractuel de Realisation, de procederaune importation de biens ou de services qui, en l'absence d'untel retard, auraient pu etre fournis dans les delais requis par uneentreprise algerienne a des conditions aussi favorables, Ie constructeur paiera une penalite egale adix pour cent (10%) de laprestation ou de la fourniture consideree."

Some very detailed contracts provide for specific differentiated basesof calculation according to the stages in the works at which the delaysoccurred:

"1 0 Pour un retard imputable au constructeur dans l'achevementdes travaux d'infrastructure ... un pour cent du prix des travauxd'infrastructure par mois de retard ...

"2° Pour tout retard ... dans l'achevement de l'edification du complexe industriel, les penalites de retard seront calculees de lamaniere prevue au paragraphe 10 ci-dessus, etant entendu quel'assiette devant servir de base de calcul de ces penalites sera constituee par Ie prix des travaux d'edification ...

"3° Pour tout retard imputable au constructeur dans Ie demarragedes 3 unites de production ... les penalites de retard seront calculees de la maniere prevue au paragraphe 10 ci-dessus, etantentendu que l'assiette devant servir de base de calcul sera constituee par la valeur du materiel de production non encore livrea laquelle s'ajoutera la valeur du materiel de production inutilisable par suite du retard de livraison d'une partie dudit materielde production.

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"4° Pour tout report non imputable a ... de la signature du procesverbal de la reception definitive ... , les penalites de retard serontcalculees de la maniere prevue au paragraphe 10 ci-dessus, etantentendu que l'assiette devant servir de base de calcul de ces penalites sera constituee par Ie prix du materiel de production ..."

Note that, in paragraph 3° of the preceding clause, the basis of calculation may be widened when the delay in performing a specific obligationhas repercussions on the effectiveness of performance of other obligations.

That is also the purport of the following clauses, taken from conditionsapplying to public contracts concluded respectively with Portugal, SaudiArabia and Egypt:

• "Si la livraison d'une partie seulement de la fourniture est enretard, les penalites sont calculees sur la valeur de cette fraction;toutefois, elles sont determinees d'apres la valeur totale de la fourniture si ce retard rend inutilisable la fraction deja livree."

• "The fine specified in the preceding Article shall be calculated onthe final account for the entire operation if, in the opinion of thesoliciting agency, the delayed part precludes full utilization of thework on the specified dates, or interferes with the use of any otherutility, or has a direct adverse effect on the completed portion ofthe work."

• "When time limits set by the contract are outpassed, the supplierand/or the contractor shall be subject to a penalty set as being 1%(one per cent) of the contractual value of the delayed part of eachcomplete week of the delay, or of the total value of the contract ifthe delay affects the project of implementing the Metro. TheOrganization's decision regarding the choice is final, and belongssolely to its discretionary authority."

In the latter two instances, note the discretionary nature of the assessments to be made in each case.

7. Ceilings. Ceilings are commonly used in international contractslO sothat the penalty is limited to a certain maximum rate:

• "The total amount of the delay penalty will not exceed a maximumof four per cent (4%) of the price of the Contract."

• "Contractor shall pay to the Owner as liquidated damages a sumequal to $50,000 for every period of 10 days which shall elapse

10 Compare with Article 20.5 of the Callier de clauses administratives generales applicables aux marches de travaux en France (Decree of 21 January 1976): "Ie montant des penaIites ... n'est pas plafonne."

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between the time mentioned above and the date of Ready for StartUp of such Working Entity, provided however, that Contractor's liability under this Article 18.2 with respect to any Working Entityshall not exceed an amount equal to 5% of the price of suchWorking Entity."

If specific penalties have been laid down according to the differentobligations, they may be cumulative:

"Les penalites susvisees seront cumulatives, Ie cas echeant."

However, an overall maximum amount is often specified for the totality of the contractual penalties:

• "Le montant global des penalites pour retard au montage et nonconformite des performances est limite aDix pour cent (10%) dumontant global prevu dans Ie Contrat."

• "The total of penalties for delay will not exceed ... % and thetotal of penalties for failure to reach the guaranteed performance will not exceed ... % of the price of the equipments mentioned in Article 6. The total of all penalties shall not exceed ...% of this price."

Whether we are looking at limiting the amount used as the basis of calculation for penalties, or imposing an individual or overall ceiling, thesecontractual practices highlight the function of the penalty clause in limiting liability.ll

8. Amnesty. Some contracts provide for the refund or reduction ofpenalties incurred during the initial phases of works if all or part of thedelay is made up at a later date:

• "Les penalites de retard versees a B conformement aux paragraphes 1° et 2° ci-dessus seront remboursees au constructeur dansla mesure ou Ie demarrage de la production tel qu'il est prevu auPlanning Contractuel de Realisation aurait lieu effectivement a lafin des trente-neuvieme (3ge), quarante et unieme (41e) et quarante-troisieme (43e ) mois acompter de la date de prise d'effet ence qui concerne respectivement l'unite-moteurs, l'unite-Iampes etl'unite- "appareils menagers."

• "Should the Constructor obtain Main Test Run Certificate by the51st month, the same amount of penalties referred to above shallbe refunded to the Constructor."

11 Cf. infra, pp. 338-340 and 346.

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• "If most of the Work is completed and can be operated continuously and should B and Contractor agree to operate the parts ofthe Plant which are Ready for Commissioning and if the production so achieved reaches 50% or 75% of the total production offertilizers the penalty per week will be reduced respectively to0.15% and 0.05% per full week."

9. Prior Formalities. Is any penalty for delay due automatically orshould any notice be given beforehand? In the absence of any express provision, reference should be made to solutions afforded by the law applicable to the contract, which vary. 12 Some of the clauses examined explicitlyconsider the point.

Here the requirement for notice is dispensed with:

• "The liquidated damages stated in Arts. 39 & 40 shall be applicable without notice, immediately after delay."

• "En cas de depassement des delais contractuels fixes dans Iemarche ou proroges dans les conditions prevues al'article 2.4., IeFournisseur est passible de penalites, quelle que soit la cause duretard et sans qu'il soit besoin d'aucune notification prealable, laseule echeance du terme Ie constituant en demeure."

And the opposite is found:

"The penalties, when applicable, will be paid by A upon request ofthe buyer submitted by registered mail."13

10. Proof ofLoss or Damage. One of the main advantages of the penaltyclause is that it establishes, in advance, the amount of compensationpayable, and it therefore dispenses the injured party from having to provethe loss or damage resulting from the other party's breach.

This is the main thrust of the following clause:

"The penalties for delay are incurred without the Organisationbeing obliged to summon the Contractor or give him any previousnotice and without proof by the Organisation of special damage."

12 The rule "Dies non interpellat pro homine" (the debtor is not on notice solelyas a result of effluxion of time) for example applies in French law (Article 1139 of theCivil Code) whereas it is excluded in German law (Section 286 II, 1) B.G.B.). The ruleis not known in common law.

13 Another possible interpretation of the clause is that the requirement for a registeredletter relates only to the payment of the penalty and that its becoming due doesnot depend on the giving of prior notice.

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However, the Group encountered examples of clauses where thepenalty for late performance only became payable where the injured partycould show loss:

• "Au cas ou la date d'achevement des travaux ne serait pas respectee par suite d'une faute du fournisseur, Ie client pourra, pourautant qu'il prouve avoir subi un dommage, exiger pour chaquesemaine de retard une indemnite de 0,50% avec un maximum de5% de la valeur de la partie des travaux de montage non terminesdans les delais fixes."

• "II a ete admis lors des discussions du 10/8/77 en nos usines que lespenalites ne sont applicables que si ... doit supporter des depensessupplementaires consecutives avos retards (penalites exigees par IeClient ou travaux ahoraire special pour rattraper les retards)."

Such clauses, which favor the contracting party owing the obligation,are to be avoided by the party to whom the obligation is owed, since theydeprive the penalty clause of a substantial part of its effectiveness. 14

An intermediate situation can be illustrated by the following clause,where the burden of proof appears to be reversed, since the party owingthe obligation has to prove the absence of damage to avoid application ofthe penalty clause:

"The penalties for delay are not applicable if the delay has causedno prejudice to the buyer."!:")

11. Arrangements for Payment. The arrangements for payment of thepenalty may be specified:

• "Liquidated damages shall comprise of the following and be paidin foreign currency."

• "Any liquidated damages due from the Seller to the Purchaserunder this Art. 10 shall be paid in US Dollars upon delivery of theobject pursuant to Sections 7.6. and 7.7. hereof."

• "The payment of these penalties will be effected by retentionon the outstanding amount remaining due by ... at the LastReady for Commissioning Certificate and/or by transfer by theContractor to ..."

14 The problem raised by these clauses is not to be confused with the questionwhether payment of the penalty clause precludes the party to whom the obligation isowed from claiming additional damages (Cf. infra, pp. 346-349).

15 Compare with Article 7.3 of Contract No. 188 of the United Nations' EconomicCommission for Europe.

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• "The Employer, without prejudice to the other collection methods,shall deduct the delay fines from sums due to Contractor."

In the last two cases, the penalty is paid by offsetting; this system will becompared below with some forms of withdrawal payments (clauses de dedit) .16

A more original clause is to be found in this contract concluded with adeveloping country:

"Toutefois, selon la nature et l'importance du retard d'une date dedemarrage, Ie maitre de l'ouvrage aura la faculte de demander enpaiement de la penalite prevue ci-dessus, la livraison gratuite parIe constructeur des pieces qui devraient etre fabriquees dans l'usine ala date de demarrage de la section de production concerneeet qui ne Ie serait pas en raison d'un retard imputable au constructeur, etant entendu que la fourniture de ces pieces devra etreeffectuee (i) dans les quantites necessaires pour assurer la production des produits dans les quantites minimales prevues apartirde chaque date de demarrage au Planning Contractuel de Realisationet (ii) pour autant que la fabrication desdites pieces n'aura pas eteassuree conformement aux normes de qualite et dans les quantitesrequises."

This clause, whose application is left, to a considerable degree, to thediscretion of the client (selon la natun: et l'importance du retard) is obviouslyliable to put the builder in an awkward position if he does not manufacturethe components in question himself. As far as the client is concerned, theattraction of this clause is, among other things, that it enables him to purchase the components in question without an import license, since the supply is free of charge.

12. Combination With Other Remedies. Does the payment of penalties onaccount of delay rule out any other remedy?

(i) Obviously, the obligation to perform still exists, as the followingclauses show:

• "The payment or deduction of such Liquidated Damages shall notrelieve the Contractor from his obligation to fulfil the Works and/or Services...."

• "Les parties conviennent que la realisation du complexe industrielet Ie demarrage des unites de production doivent etre executeesavec la plus grande diligence et dans Ie respect des imperatifs vises

16 Cf. ir~fra, pp. 336-337.

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aux presentes. En consequence, certaines penalites de retard ontete prevues en vue d'assurer la sanction du non-respect de certainsdelais. Elles ne sauraient toutefois diminuer en rien les garantiesstipulees aux presentes."

(ii) However, the client will often reserve the right to rely on otherremedies, such as the correlative suspension of payments:

"Delays in delivery, notwithstanding other penalties they may entail,have a suspensive effect on payments. Payments are resumed onlyafter deliveries have been restored to their normal course."

or the cancellation of the contract in whole or in part:

• "L'application des penalites est independante des autres sanctionsauxquelles Ie retard peut donner lieu, notamment la resiliation dumarche."

• "The Authority shall also have the right to require the Contractoreither to complete the works and continue payment of the saidsum or at once or at any time thereafter by simple written noticecancel the contract or take the execution thereof out of the handsof the Contractor."

• "Si Ie calendrier d'execution de la phase prototype figurant enannexe III n'est pas respecte, Ie titulaire encourt par jour de retardet sans mise en demeure prealable, des penalites dont Ie montantest calcule par application de la formule ci-apres ... De plus, lacommande annuelle du materiel de serie pourra etre diminueepar mois de retard d'un nombre de materiel egal au douzieme dela livraison prevue. En cas de mois incomplet, cette diminution sefera pro rata temporis sur la base de ... mois de 30 jours."

(iii) Is the obligee entitled to claim additional damages over and abovethe amount of the penalty clause providing for compensation for delay?This is the aim sought by the following clauses:

• "Les penalites de retard visees aux paragraphes 1 et 2 ci-dessus sontexclusives de tous dommages et interets auxquels Ie maitre de l'ouvrage pourrait pretendre en raison d'un retard imputable au constructeur, acondition que la reception definitive intervienne demaniere satisfaisante dans Ie delai contractuel."17

• "Independamment des dispositions des Articles concernant lespenalites au cas OU l'inexecution ou la mauvaise realisation desobligations du Vendeur entraineraient directement ou indirecte-

17 A wnlrario, therefore, additional damages may be claimed if the delay has notbeen made up at the time when final acceptance takes place.

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ment soit un retard de mise en production, soit un arret de production de l'Unite, les Parties determineront d'un communaccord Ie montant du prejudice subi par l'Acheteur et apayer par... A defaut d'un tel accord, les parties conviennent de s'en remettre al'arbitrage tel que defini contractuellement, mais il est toutefois convenu entre les Parties que Ie montant total du prejudice nepourra depasser dix pour cent (10%) de la valeur de la chaine ouinstallation consideree."

Sometimes provision is made for additional damages only in order tomake good a specific type of loss:

"Si, par suite de la negligence ou de la mauvaise organisation duFournisseur, Ie programme d'execution defini a l'article 2.3. nepeut etre respecte et si Ie retard par reference a ce programmed'une quelconque prestation acharge du Fournisseur engendreune modification des conditions (delais, cofH ... ) dans lesquellesdevaient se realiser des prestations acharge d'autres fournisseurs,la responsabilite de toutes ces modifications induites incombera auFournisseur. Le maitre de l'Ouvrage sera en droit de revendiquerIe paiement de dommages et interets sans prejudice al'applicationdes penalites prevues en cas de non-respect des delais contractuels.Cette clause sera notamment d'application dans Ie cas de la fourniture tardive par Ie Fournisseur d'informations necessaires al'execution d'autres fournitures que la sienne ou en cas de retardlors du montage engendrant des perturbations du planning demontage d'autres equipements."

The following clause, which provides for the non-application of indexation to the price of the performance that is delayed, also results in imposing an additional penalty on the contracting party in breach:

"During the period of such delay, price adjustments due to indexation as per sub-clause 8.5.1. shall not apply to the price of thedelayed portion."

(iv) A novel additional remedy consists in deferring the starting pointfor the guarantee period:

"In such case, the guarantee period shall start upon payment ofsuch liquidated damages."

This clause is intended to encourage rapid payment of the penalty. Butdoes it not deprive the client of any guarantee in the meantime? It wouldbe more appropriate to provide that the guarantee period should beextended rather than merely deferring its starting point.

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(v) In contrast, some contracts, which are more favorable to the constructor, preclude any other sanction:

• "The penalties for delay in deliveries and for failure to reach theguaranteed performance are limitative and their payment whichcompensates the Buyer for the prejudice suffered excludes allother compensation for indirect or consequential damages."

• "Au cas ou la date d'achevement des travaux ne serait pas respectee par suite d'une faute du fournisseur, Ie client pourra, pourautant qu'il prouve avoir subi un dommage, exiger pour chaquesemaine de retard une indemnite de 0,50% avec un maximum de5% de la valeur de la partie des travaux de montage non-termineedans les delais fixes. Toutes autres pretentions seront exclues."

• "The liquidated damages specified in each Section of this Art. 10are independent of each other and cumulative and shall not limitor affect any rights of the Parties pursuant to any other provisionsof this Contract, provided, however, that such liquidated damagesshall be strictly limited to the extent specified in each Section andthe Purchaser may not on account of the deficiencies specified inArt. 10 claim other than for such liquidated damages."

Combining a penalty clause with other remedies gives rise to delicatelegal problems depending on the applicable law. IS

13. Penalties and Incentives. In some contracts, a penalty clause, penalizing delay in performance, takes over from a premium providing a reward forearly performance. The following example shows how this combination creates a scheme to encourage the rapid execution of promised performance:

"A bonus/liquidated damages scheme related to Time of Performance has been agreed between Company and contractor asdefined in Appendix 16 entitled 'Delivery Incentive Scheme.' TheIncentive Scheme is established to motivate Contractor toward anearly completion of the Plant, in consideration of the importancethat such early completion has for Company.

"Bonus is the amount by which compensation of Contractor will beincreased in accordance with the method of calculation specifiedherein.

18 Cf. infra, pp. 346-349.

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"Penalty is the amount by which the compensation of Contractorwill be decreased as liquidated damages in accordance with themethod of calculations specified herein.

"INCENTIVE SCHEME

"The mechanical completion target date of fuel units is establishedas March 15, 1979.

"The mechanical completion target date of plant is established asJune 15, 1979.

"The amount of bonus or Penalty attributable to Contractor shallbe calculated as follows:

"If mechanical completion of fuel units occurs on or before themechanical completion target date of fuel unit and mechanicalcompletion of plant occurs on or before the mechanical completion target date of plant, Contractor will earn a Bonus of USDollars $750,000.

"If either mechanical completion of fuel units occurs after themechanical completion target date of fuel unit or mechanical completion of plant occurs after the mechanical completion targetdate of plant, Contractor will pay a penalty of US Dollars $750,000.

"For each calendar day that mechanical completion of fuel unitscomes earlier than mechanical completion target date of fuel unit,Contractor will earn a Bonus of US Dollars $6,700 up to a maximum amount of US Dollars $800,000.

"For each calendar day that mechanical completion of plant comesearlier than mechanical completion target date of plant, Contractor will earn a Bonus of US Dollars $3,350 up to a maximumamount of US Dollars $400,000."19

Together with the bonus for early completion, the penalty clausebecomes in this case a component of a novel incentive scheme. Later onwe will discuss the relationship that should be established between penaltyclauses and price adjustment clauses. 2o

19 The clause in question has a curious, doubtless unintentional feature: on theoperative date, there is an immediate switch from a bonus of $750,000 to a penalty of$750,000.

20 Cf. infra, pp. 337-338.

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14. Failure to Comply With a Quicker Performance Date. Another interestingclause examined by the Working Group penalizes very severely the delay ofa builder who had obtained the order by offering rapid performance. Thestarting point of the penalties coincides with the time periods stipulated inthe offer and the maximum amount of the fine is increased:

"En el caso que el Contratista hubiese consignado en su oferta unareducci6n del plazo indicado en 12.11a multa indicada en 12.2.1.se aplicara a partir del vencimiento del plazo ofrecido. En estesupuesto el valor limite del diez por ciento (10%) para la aplicaci6n de multas por atraso mencionado en 12.2.1. se ampliara enun diez por ciento (10%) adicional por cada mes 0 fracci6n mayorde une semana de reducci6n del plazo ofrecido. Este ultimoteniendo en cuenta que la reducci6n del plazo previsto es un elemento que incide en el cotejo de las ofertas."

(b) Contracts for Supply. Some supply contracts provide, in the eventof late delivery, for the imposition of similar penalties to those described inthe above construction contracts. Thus, the clause below, relating to thesale of a ship, provides for a grace period, a progressive scale of penaltiesfor late delivery and the option for the buyer to cancel the contract if thedelay persists:

"Delayed delivery:

"(1) No adjustment shall be made and the purchase price shallremain unchanged if the Vessel is delivered within one (1) monthafter the Contract Delivery Date, otherwise provided for in thisContract.

"(2) For each and every day of late delivery, beginning with midnight of the day one (1) calendar month after Contract DeliveryDate, the purchase price of the Vessel shall be reduced by deducting therefrom per diem of delay in delivery as follows:

"a) Japanese Yen 800,000 per day for second month"b) Japanese Yen 1,200,000 per day for third month"c) Japanese Yen 1,600,000 per day for fourth month"d) Japanese Yen 2,000,000 per day for fifth month"e) Japanese Yen 2,400,000 per day for sixth month.

"The maximum for which adjustment shall be made shall be six(6) calendar months running from the delivery date as providedfor in Article 7 hereof, otherwise set forth in this Contract.

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"(3) However, if delay in delivery of the Vessel, for which thebuilder is responsible, continues for a period of over six (6) calendar months after Contract Delivery Date, the company may, atits option, cancel this Contract by serving upon the builder writtennotice of cancellation, or accept the vessel with adjustment as perParagraph 1, sub-paragraph (2) of this article."

Progressive penalties are also provided for by this clause taken from asupply contract for electrical equipment, but they take effect immediatelyand they are subject to a ceiling:

"Au cas de retard dans la livraison imputable au fournisseur, illuisera applique les penalites suivantes:

"Un pour mille (1/000) de la valeur CIF/ ANNABA du materiellivre en retard par jour calendaire de retard pendant les quinze(15) premiersjours.

"Trois pour mille (3/000) de la valeur CIF/ ANNABA du materiellivre en retard par jour calendaire de retard apartir du 16c jour.Neanmoins, Ie montant de ces penalites ne saurait en aucun casdepasser 5% du montant global de la fourniture."

The following clause, relating to the sale of tractor-vehicles, makes thepayment of fines for late delivery preclude any other remedy:

"En caso de producirse demoras en la entraga de cualquiera de losLocotractores, el Vendedor pagani al Comprador en concepto demulta una suma equivalente al medio por ciento (0.50%) del valor,antes de cualquier ajuste de precio, por cada quince (15) dias corridos 0 fracci6n mayor de siete (7) dias corridos de atraso, hastaun limite del cinco por ciento (5%) del valor antes de cualquierajuste de precio, de cada Locotractor demorado, con la salvedadque el Vendedor no pagani multas por demoras en el despacho 0

o tros incumplimientos j ustificados 0 excentos de responsabilidad,segun el Articulo N°ll. Dichas multas a cargo del Vendedor constituiran la liquidaci6n total de cualquier obligaci6n del Vendedorhacia el Comprador por la respectiva demora."

The following clause, taken from a contract between a Polish seller anda Swedish buyer, also stipulates exemption from other remedies. Note alsothe grace period, the buyer's release from the obligation to pay interestduring the seller's delay and the buyer's option on the expiry of 180 days:

"If the object is delivered later than the date required ... the Sellershall not be required to pay any liquidated damages for the first 30

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days of such delay, but thereafter the Seller shall pay to PurchaserUS $7,000 as liquidated damages for each whole day exceedingsuch 30 days free of penalty.

"Furthermore, the Purchaser shall not pay interest on Letter ofCredit amounts as per Art. 5, sect. 5.2. during such periods of delayfor which the Seller is responsible. The Purchaser may not claimon account of any delay compensation over and above said liquidated damages or make any claim on account of any delay.

"If the delivery of the object shall be delayed for more than 180days beyond the date required ... for any reason, the Purchasershall be entitled, at his option, to:

"(a) reject the object, or,"(b) accept the object at the contract price ... minus the liquidated damages, payable under this section 10.1 ... , or"(c) accept the object at a mutually agreed price."

(c) Loan Contracts. Appropriate compensation for the loss ensuingfrom delay in the re-payment of a loan of money normally consists in thefact that interest continues to accrue at the market rate. The sanction fordelay ceases to be purely in the nature of an indemnity where provision ismade for the interest normally due to be increased, as illustrated by the following example taken from a Eurodollar loan contract:

"4.5. Inter-est Rate on amounts over"due--If the Borrower fails to payany sum on the date on which such sum becomes due and payablethe Borrower shall (without prejudice to all other rights and remedies of the Agent and the Banks in respect of such failure) pay tothe Agent for the account of the Banks to which such sum is due,interest on such sum from the date of such failure up to the dateof actual payment (as well as before any judgment), calculated ona day to day basis for so long as such sum remains unpaid at a ratewhich is the aggregate of

"4.5.1. two and one half of one per cent per annum, and

"4.5.2. either

"4.5.2.1. in the case of a principal amount which becomesrepayable during an Interest Period, until the expiration of thatInterest Period, the arithmetic mean (rounded upwards to thenearest whole multiple of one sixteenth of one per cent, if suchmean is not already such a multiple) of the respective rates quotedby the Reference Banks for the determination of he interest rateapplicable to that Interest Period; or

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"4.5.2.2. in any other case or if the Interest Period referred to insub-paragraph 4.5.2.1. has expired, the arithmetic mean (roundedupwards to the nearest whole multiple of one sixteenth of one percent, if such mean is not already such multiple) of the respectiverates which the Reference Banks would from time to time havenotified under sub-clause 4.4. if the overdue amount constitutedan Advance made for successive periods (each of which shall constitute an Interest Period) of such respective duration as may befrom time to time selected by the agent."

2. Breach of Performance or Warranty of Quality

Performance guarantees are regularly provided for in various types ofcontracts, in particular contracts for the construction of plants, supplies ofequipment and manufacturing licenses. Breach of such guarantees is oftenmade subject to a system of penalties that have certain analogies with thepenalties imposed for delays in performance. Similar clauses may also beoperative in the event of breach of a warranty of quality given by the vendors.

(a) Hypothesis-Imputability. The hypothsesis concerned is generallydescribed by reference to the guarantee clauses themselves.

• "If the plant does not meet its Performance Guarantee (section 13above ... )."

• "Au cas ou, apres des essais de garantie n~petes selon la clausenumero 11 ... les garanties totales mentionnees dans les clausesnOI2.2. et 12.3. ainsi que 12.4., ne peuvent etre atteintes, ..."

The problem of imputability does not arise where the obligation is anabsolute one, as is the case, for example, with the guarantee for latentdefects due from the vendor under French law (Article 1641 of the CivilCode). In contrast, a performance guarantee offered by a builder seemsgenerally speaking-under the approach taken by French law-to comeinto the category of obligations to achieve a specific result, where the person under the duty to fulfill the obligation may still prove certain exonerating circumstances.

"In the event that ... the equipment does not meet the minimumperformance levels, except for reasons due to K or to forcemajeure or similar events beyond the control of A ..."

(b) Differentiated Clauses. A clause providing for sanctions for shortcomings in performance is sometimes broken down into specific provisionsdepending on the various components of the works or the various featuresof the breach:

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"1.5.2.2. Liquidated damages (Performance)

"1.5.2.2.1. For non-fulfilment of the guaranteed capacity ..."1.5.2.2.2. For the Beneficiation Unit ."1.5.2.2.3. For the Sulphuric Acid Unit ."1.5.2.2.4. For the Phosphoric Acid Unit ."1.5.2.2.5. For the Fertilizer Units ..."1.5.2.2.6. For the Fluorine Salts Units ..."2. Insufficient Speed ..."3. Excessive Fuel Consumption ..."4. Insufficient Deadweight Tonnage ..."

(c) Progressive Increase-Tolerance. A scale of differences, in relationto the performances guaranteed, is often laid down whereby the penaltiesincrease with the size of the difference. A tolerance may be provided for:

"En cas de non-obtention des qualites garanties, A paiera aB "lespenalites suivantes:

"Pour chaque 0,25% de P2 05 en dessous de 31 %, 3 millions FB.

"Pour chaque 0,25% de P2 05 en dessous de 30%, 6 millions FB.

"Pour les premiers 5% de debit reduit: pas de penalite.

"Pour les seconds 5% de debit reduit:? Pour chaque 1% completde debit reduit: 0,5% du prix du contrat.

"Pour les troisiemes 5% de debit reduit: 1%. Pour chaque 1% complet de debit reduit: 1% du prix du contrat."

The following clause provides for a less elaborate system of proportionally reducing the price:

"Si l'alternateur ne peut fournir la puissance garantie, diminueede la seule tolerance de mesure de cette puissance, Ie prix globalsera reduit dans Ie rapport de la puissance reellement developpeeala puissance garantie."

In other contracts, the manufacturer enjoys a period of grace in orderto attain the promised performance, before being punished either bypenalty proportional to the additional duration due to its failure to fulfillhis obligation or by a flat rate penalty:

• "A period of (4) months for commissioning is allowed from timeof granting the Last Ready for Commissioning Certificate up to the

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issuing of the Main Test Run Certificate. If the plant does not meetits Performance Guarantee (section 13 above) by the expiry of thisperiod, the Contractor shall pay liquidated damages of 0.05% ofthe Contract Price for each day of the delay up to a maximum of60 days."

• "In the event that, four months after the contractual delivery date,the equipment is not ready for acceptance or does not meet theminimum performance levels, except for reasons due to K, or toforce majeure or similar events beyond the control of A, K shallreceive from A an additional sum of one hundred thousandFrench Francs (100,000) as liquidated damages."

(d) Basis of Assessment. The basis for assessing the penalty may alsovary as in the case of compensation for delay. Here is an example of a basisfor assessment that varies according to the deficient element:

• "Above percentage will apply to the total Contract Price."• "For the NPK Unit and the Fluorine Salts Units, the same principle

will apply but the percentage will apply to the price of each Unit."

(e) Ceilings. Penalties for non-fulfilment of guaranteed performanceare often subject to ceilings:

"Les penalites payables par A au titre de l'article 11.1. ne pourrontdepasser 6% du prix de vente."

Furthermore, a global maximum limit is often laid down for the contractual penalties as a whole.

(f) Arrangements for Payment. The methods for the payment of compensation for non-fulfilment of guarantees are rarely specified. It is true, however, that they generally consist of a reduction in the price, which obviouslyfacilitates recovery. Moreover, there is no question of proving the damage,since this is objectively established by the fact of insufficient performance.

(g) Combination With Other Remedies. Does payment of a performance penalty preclude any other remedy?

1. The clauses of this type considered by the group rarely raised thisissue, unlike the clauses relating to delay discussed above. The only clausefound was the following, where the penalty is expressly stipulated to releasethe other party from all other obligations:

"... the Contractor shall pay the liquidated damages according tothe scale hereunder.

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"Mter that payment, the Unit(s) shall be deemed to have completedthe Test Run(s) and have met their performance guarantees."

2. The scale of penalties, however, goes down generally only to a specific degree of default, beyond which other remedies may replace thepenalties:

• "Pour un debit reduit et une non-obtention des quantites selon laclause n012, de plus de 15%, l'acheteur est autorise a:"soit demander une diminution correspondante de prix"soit demander la resiliation du contrat complete ou partielle."Dans ce cas, un entretien aura lieu entre Ie vendeur et l'acheteurapres Ie proces-verbal de prise en charge pour parvenir aun reglement al'amiable."Au cas 011 ce reglement ne pourrait etre obtenu, Ie tribunald'arbitrage decidera des droits et devoirs des deux partenaires ducontrat."

• "3.2. If the Equipment falls below 90 per cent efficiency the purchaser shall be entitled to return the Equipment to the supplier onthe terms set out in sub-clause (4)."4. If the purchaser exercises his right to return the Equipmentthen:"(i) The supplier shall refund forthwith all the purchase money,including cost of transportation, all duties, levies and taxes and thecost of installation and commissioning; and"(ii) The supplier shall allow the purchaser the use of the Equipment free of charge for such a period (not exceeding twelvemonths) as the purchaser shall reasonably require to order andobtain delivery and installation of alternative equipment, and"(iii) The supplier shall remove the Equipment and make goodthe site at his own expense."

(h) Penalties and Incentives. As with penalties for delay, compensationfor insufficient performance or quality may be combined in an overallincentive system in which bonuses constitute a reward for performance orquality exceeding what was promised.

Here is an example in which a groundnut seller receives an increasedprice if he supplies products of superior quality or a decreased price if theproducts supplied are inferior:

"9. Quality: the groundnut kernels to be in good condition at thetime of shipment and on arrival the basis shall be:

"(a) Purity: the Buyer to receive an allowance equal to the percentage of admixture.


"(b) 47% Oil Content to be determined in the pure kernels bytotal extraction method using ether as the solvent. Any excess tobe paid for by Buyer and any reduction to be allowed for by theSeller at the rate of 1% of the contract price of each 1% oil. Allfractions in proportion.

"(c) 3% Free Fatty Acid Content (expressed as Oleic Acid,Molecular Weight 282-and as a percentage of the extracted oil.Any reduction to be paid for by the Buyer at the rate of 1% of thecontract price for each FFA.

"Any excess to be allowed for by the Seller at the rate of 1% of thecontract price for each 1% FFA up to and including 7% FFA andthe rate of 2% of the contract price for each 1% FFA over 7% FFAup to and including 10% FFA. All fractions in proportion. If theFFA content is over 10%, the Buyer shall receive an allowance tobe agreed upon between the Buyer and Seller or by arbitration asstipulated in Clauses 21 and 22."

With such a clause it is difficult to determine the demarcation linebetween a penalty clause and a price adjustment clause21 •

3. Failure to Supply

The obligation of the vendor to supply the object of the contract rarelyseems to be covered by penalty clauses.22

However, here are two clauses of this type that were stipulated in orderto cover eventualities in which failure to deliver could give rise to a particular loss or damage on the part of the purchaser.

(a) In a contract for the supply of steam, the clause provided for compensation proportionate to the duration of the failure to supply, but thevendor took care to limit his liability to the payment of that compensation:

"En cas d'inexecution d'une des clauses du present contrat parl'Exploitant pouvant entrainer une diminution de l'energie misea disposition de X, ou en cas de demande de vapeur, conforme al'article II (c'est a dire 3 heures avant) non-honoree, X sera fondea reclamer a l'Exploitant une penalisation egale a:F(P2A,5000) parheure complete d'insuffisance.

21 Cf. infra, pp. 337-338.

22 What is contemplated here is a case of irremediable failure to deliver; the caseof a mere delay in delivery has been considered earlier.

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"X pourra deduire ces penalites des facturations que lui feral'Exploitant au titre du present contrat. Les penalites prevues aupresent article constituent les seuls dommages et inten~~ts susceptibles d'etre reclames par Ie Client tels que prevus au Code civil(article 1150 et suivants) par suite d'inexecution de ses obligationspar Ie prestataire et ce, a l'exclusion de tout autre prejudiceimmateriel. "

The loss caused to the purchaser by an interruption of supplies ofsteam is liable to be disproportionately large in comparison to the supplier's interest in the contract. The above clause limits his liability.

(b) The following clause illustrates the specific problem of establishing the damage ensuing from the failure of a sub-contractor. Such damage may also be considerable insofar as a default in relation even to acomponent or a secondary operation may compromise the whole of theoperation. The following clause deals with the supply of gearboxes for carsby a sub-contractor:

• "Dans Ie cas 011 les chaines de montage de vehicules destines arecevoir les boites seraient arretees chez A ou chez l'un de ses soustraitants en France, par manque de boites imputable contractuellement aB, B paierait aA une indemnite egale a la valeurde la boite par vehicule qui ne pourrait pas etre termine de ce fait.

• "La quantite de vehicules aprendre en consideration serait la quantite moyenne journaliere de vehicules produits par A dans Ie moisprecedent l'arret de chaine. A doit informer B au moins deuxsemaines al'avance de l'arret eventuel des chaines de montage et Ba Ie droit d'envoyer chez A un representant pour constater les faits."

This example is very characteristic of the special situation in which,because one contract is inserted into another, the failure to perform theformer is bound to cause substantial consequential damage.

4. Failure to Perform an Obligation to Purchase

(a) Under some supply contracts, the purchaser undertakes to take aminimum quantity and this obligation may be the subject of particularlysevere penalty clauses. Here is a first example:

"In case Buyer's offtake during any calendar year will be lower thanthe quantity mentioned above minus 10%, then Buyer will pay toSeller over the difference in quantity between the thus fixed quantity and the quantity actually supplied a penalty of 50% over the


average selling price per metric ton paid in that particular calendar year."

The following clause, which relates to a contract for the supply of gas,is even more draconian since the quantities not taken are invoiced (take orpay), which is tantamount to imposing a IOO-percent compensation.

"Pour tous les debits constates inferieurs au minimum convenu, Xfacturera aZ, a titre d'indemnite de mise al'air, les quantites manquantes. Toutefois, aucune penalite ne sera facturee si les quantitesmanquantes sont inferieures a 2% de la quantite d'hydrogeneprevue d'etre livree dans Ie mois, cette quantite etant obtenue enmultipliant les debits horaires convenus par Ie nombre d'heuresconvenu dans Ie mois.

II est entendu que cette indemnite de mise a l'air ne sera verseeque dans la mesure OU les quantites manquantes seront dues aufait de Z, et dans la mesure OU il n'y aura eu ni force majeure, nientente prealable."

The severity of the sanction is due to the fact that the gas not taken hasto be evacuated (mise Ii l'air) and it is therefore lost to the vendor. On theother hand, such take or pay obligations in gas supply contracts are oftenalso justified by the fact that the supplier is himself bound by long-termcontracts containing strict obligations of purchasing minimal quantities.

(b) Counter-trade contracts also impose an obligation to purchase, thatis to say the purchase of compensation products, to the extent of a specified percentage of the price of the main supply.23 Typically, this obligationis coupled with a penalty clause:

"Au cas Oll B ne remplirait pas ou ne remplirait qu'en partie sesengagements d'achat pour des raisons dont il aurait ajustifier, Bverserait aA sans autres reclamations une penalite de ... % de lavaleur de l'engagement non-rempli.

"En couverture des penalites, B depose a la mise en vigueur del'accord une garantie bancaire aupres d'une banque de premierordre. Cette garantie diminue en liaison avec Ie montant de lapenalite portant sur les sommes en compte."

23 See M. Fontaine, Aspects juridiques des contrats de compensation, D.P. G.I, 1981,7, pp. 179-223.


It will be noted that the penalty is covered by a bank guarantee, a stipulation habitually found in offset contracts. 21

5. Failure of a Licensor to Discharge His Obligations With Regard to theDefense of Patents

In a patent licensing agreement, the licensor undertakes to defend thepatents against use by third parties. The sanction attached to this obligation consists in the provisional suspension of royalty payments:

"A shall take prompt enforcement action, against third partyinfringers whose infringement activity coincides with B's efforts tosell Products manufactured under this Agreement. Failure on A'spart to take appropriate steps to enforce its rights under thepatents in Appendix A within 90 days of notice by B of third partyinfringement activity noted above shall exempt B from payment ofany further running royalty on Products that B continues to sell inthe considered country."

This suspension is not to be equated with the defense of withholdingperformance, as its effects are definitive: royalties unpaid during the licensor's period of inactivity will never ever be payable. But is this a penaltyclause? The sanction does not require the obligor to pay a sum of money,but he incurs the loss of a sum that would otherwise be payable to him. 25

6. Failure to Comply With an Obligation to Refrain From Acting

(a) Certain obligations to refrain from acting, which are imposed uponthe licensee under a manufacturing licensing contract, stipulate penaltiesby the following clause:

"Sous reserve d'autres dommages que A aurait Ie droit de reclameraB pour prejudices qui pourraient lui etre causes, B s'engage apayer aA une penalite de francs suisses 200 (deux cent francssuisses) par cheval effectif en cas de violation des articles II (interdiction prevue au deuxieme alinea), et article X du presentcontrat et pour chaque moteur fabrique, fourni ou vendu, directement ou indirectement, contrairement aux stipulations dupresent contrat.

24 Id. pp. 198-200.

This manner of proceeding is also mentioned in the proceedings ofUNCITRAL: seeDoc. A/CN9/WG.2/WP.33, February 12, 1981, No. 17.

25 Cf.in/fa, pp. 340-341.


"En outre, A pourra, dans ce cas de violation de la part de B, resilierimmediatement de plein droit Ie present contrat sans aucuneindemnite ni dedommagement quelconque."

Consequently, the clause does not preclude combining the penaltywith additional damages; termination of the contract is also possible.

A similar provision may be found in a standard form contract relatingto the sale of the right to use a tailor-made software product.

"Au cas 011 Ie client proposerait ou vendrait un programme, ouproposerait a la vente des services sur un programme ayant desperformances comparables au progiciel qui fait l'objet du presentaccord, ... aurait Ie droit de faire examiner ce programme par unexpert independant.

"Si cet expert constate que Ie programme cede est identique entout ou partie au progiciel objet du present accord, ou en est manifestement une derivation directe, Ie client devra verser a... 150%(cent cinquante pour cent) du prix re<;;:u pour la fourniture duprogramme ou du service, mais au minimum 500,000 FF (cinqcent mille francs fran<;;:ais) pour chaque proposition ou cession duprogiciel, amoins que Ie client ne puisse apporter la preuve parecrit qu'il a acquis d'un tiers, notoirement possesseur d'un logicielcomparable, Ie droit d'utiliser et/ou de ceder ledit programme."

The severity of this clause is designed to make up for the weaknesses inthe legal protection of intellectual property in the information technologysector. Vendors seek to protect themselves by contractual means and thedeterrent effects of very heavy penalties. A further notable feature of thispenalty clause is that it stipulates a minimum amount.

(b) The German Defense Ministry endeavors to suppress the grantingof advantages to its representatives responsible for concluding public contracts. Since the applicable criminal provisions are liable to be withouteffect vis-a-vis foreign companies, contractual sanctions are arranged byministerial circulars and inserted into contracts. Here is an example:

"Der Auftragnehmer oder seine Beauftragten durfen Personen,die beim Auftraggeber mit Aufgaben auf dem Gebiet der Forschung,Entwicklung oder Beschaffung betreut sind, weder unmittelbarnoch mittelbar Vorteile anbieten, versprechen oder gewahren.Dies gilt auch, wenn ein Vertrag uber ein Vorhaben der vorbezeichneten Art nicht zustande kommt.

"Fur jeden Fall der Zuwiderhandlung hat der Auftragnehmer demAuftraggeber eine Vertragsstrafe in Hohe von 10% des im Angebot


genannten Preises zu zahlen. Gibt der Auftragnehmer innerhalb von10 Jahren weitere Angebote ab, so sind bei der Berechnung derVertragsstrafe auch die Preise dieser weiteren Angeboten miteinzurechnen. 12 VOL/B findet keine Anwendung. Der Auftraggeber kann bei Vorlegen besonderer Umstande die Vertragsstrafenach Massgabe bestehender Vorschriften herabsetzen."

It will be noted that the conduct to which the penalty applies is generally pre-contractual, and that the penalty applies even if the contract isnot concluded (it is however binding if the party contravening the clauseis bound by the conditions of the call for tenders to which it responded);this falls outside the normal run of penalty clauses. The seriousness of thepenalty will also be noted, since it is applicable to all tenders made over thenext ten years; consequently, a whole pattern of trading is affected.

B. General Considerations Concerning Practice

The analysis carried out by the Working Group is based principally onthe sample collected by its members. This analysis has enabled a numberof conclusions to be inferred with regard to practice in the matter ofpenalty clauses in international contracts. In what types of contracts do theyappear in particular? To what types of obligation do they relate? What techniques are used to develop these clauses? But is the sample sufficiently representative as to allow the conclusions to reflect fully and faithfully whathappens in practice?

It would be presumptuous to draw this conclusion. Penalty clauses aretoo diversified in their applications for the group to make any claim that itcould have covered all their aspects having regard to the group's randomcomposition and the manner in which its contributions were selected.

However, there has been other research into penalty clauses. The U.N.Commission on International Trade Law has taken an interest in penaltyclauses, as we have already mentioned; uniform rules have been adopted.At the beginning of its work, UNCITRAL also gathered useful informationabout practice in this area.26 Yet even though UNCITRAL obviously has better means of investigation at its disposal, no more does its sample appearto fully reflect the phenomenon as a whole as far as the Working Group hasbeen able to tell. The brief reflections set out below compare the findingsof these two research efforts with a view to to pinpoint what has been established and what might be subject to further investigation.

26 See Liquidated Damages and Penalty Clauses, Report of the Secretary General,Doc. AjCN.9j161, April 25, 1979 (hereinafter referred to as "the First UNCITRALReport") and Liquidated Damages and Penalty Clauses (II), Report of the SecretaryGeneral, Doc. AjCN.9jWG2jWP.33, 12 February 1981 (hereinafter referred to as "theSecond UNCITRAL Report").

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1. Types of Contracts

As for the types of contracts in which penalty clauses were found,there is a marked difference between the Working Group's sample and thefirst sample used by UNCITRAL. The Working Group, doubtless owing toits particular make-up, principally concentrated on clauses taken frombuilding contracts. In contrast, UNCITRAL's first sample was made up of71 sales contracts, as against only five contracts "for the supply of equipment and service" and three other contracts. 27 UNCITRAL's secretariatrealized that its sample was skewed in this way28 and seems to have corrected it subsequently.29

In any event, comparison of the two investigations shows that penaltyclauses are frequently met, both in sales contracts and in construction contracts. But to judge by some of the examples cited/)() they also appear to bepresent in other contracts (loan, transport, distribution, licensing, etc.),and it would be worth the effort of a more detailed analysis.

Furthermore, the first UNCITRAL sample apparently includes a substantial proportion of clauses taken from general conditions, whereas theGroup worked almost exclusively on clauses incorporated in negotiatedcontracts. It seems that this difference was also attenuated by UNCITRAL'ssecond sample.31 Without denying the quite special interest of clausestaken from general conditions (especially from UNCITRAL's perspectiveof drawing up a uniform law), negotiated clauses would be a better choiceto reveal the wide variety of penalty clauses encountered in practice.

2. Types of Obligations

In our view,32 what is more enlightening is the analysis based on thetypes of obligations which may suitably be the subject of penalty clauses. Wehave set out here the very interesting table drawn up by UNCITRAL's secretariat on the basis of its first sample:

27 First UNCITRAL Report, p. 11, No. 32 (pagination is given for the English version of the two reports).

2S Id., p. 13, note (11).

29 Second UNCITRAL Report, p. 5, note (7). However, no more figures are givenagainst the list.

30 Cf. supra, pp. 318-319 and 326-328.

31 Second UNCITRAL Report, p. 5, No.8.

32 Cf. SLlfJTfL pp. 301-302.


''Kinds ofbrrach fOT which liquidated damages 01' penalties weTe payable, thenumber- of liquidated damages 01' penalties clauses fOT each type of bTeach:

Delay in delivery goods by selleT:Delay in payment by buyer-:Delay in shipment by seller-:Diminution ofpTice consequent upon quality defects in goods:Delay by buyeT in taking delivery:FailuTe to meet guamnteed standaTds:Non-deliveTY ofgoods:Violation by buyeT ofpTOhibition of expoTt out ofthe countTy of destination:Default in geneml:Delay in deliveTy of technical documentation:Non-payment of the price:Payment by borroweT in advance of the stipulateddate ofTepayment:Default in tender- of documents:Default in shipment by selleT:Delay by buyeT in taking up documents pTesented by selleT:Payment by buyer- not in accoTdance with instTuctions:

24241110544

3322

11111 "33

This list confirms one of the Working Group's findings, namely theparticular frequency of penalty clauses for delay in performance. UNCITRAL observed this in connection with sales (obligations of the vendor)34as the Group mainly found with regard to construction contracts (obligations of the builder). In contrast, whereas UNCITRAL found numerousclauses containing a penalty for delay in the payment of the price by thepurchaser, surprisingly, the Group did not find any clauses covering delayin the payment of the price by the client. Conversely, the Group foundnumerous penalty clauses relating to performance guarantees,35 whileUNCITRAL concluded that such clauses were infrequent. 36 Complementary investigations of these two practical aspects would be useful.

The relative rarity of clauses imposing penalties for failure by the vendor to deliver as found by the group37 is borne out by UNCITRAL's list.

In view of its interest, we will include a passage from the Second UNCITRAL Report, which sets out to establish a link between the stipulation ofa penalty clause and the characteristics of the obligation to which it relates:

33 First UNCITRAL Report, pp. 11-12, No. 32.

34 Id., p. 11, No. 32.

35 Cf. infra, pp. 319-323.

36 Second UNCITRAL Report, p. 14, No. 33.

37 Cf. supra, pp. 323-324.


''An analysis of these clauses indicated that theiT use was associated, not

with the contTact being of a cer-tain type, but with the pTObable pTesence ofsome of the following featuTes:

"(i) BTeach of the main obligation was Telatively easy to pTOve (e.g. FailuTe todeliver- on time, failuTe to meet a technical specification);

"(ii) The existence ofsome basis at the time of conclusion of the contmct fOT

estimating the loss likely to be caused fTOm a br-each. In r-egard to some types

of contTacts, nOTms appeaTed to have developed in the tTade defining thelimits of the agreed sums which paTties might stipulate;38

"(iii) PTOof of actual loss might be costly OT difficult;

"(iv) BTeach of the main obligation is not ofso serious a chamcter- as to justify, at least initially, the ending of the Telationship between the paTties;

"(v) A need to limit the liability exposur-e of the paTty liable fOT br-each of themain obligation;

"(vi) CiTcumstances which make it impoTtant to a paTty that he Teceive per-fOTmance and not damages fOT br-each. '~-)9

3. Absence of Penalty Clause

The absence of a penalty clause in certain contracts or with regard tosome obligations may provide a contraTio proof of the foregoing analysis.UNCITRAL has published a number of statistics,40 which tended to show,on the basis of the first sample, that penalty clauses were absent from morethan half the contracts. There did not seem to be any correlation betweentrade in a given product and recourse to such clauses. UNCITRAL furtherraised the question whether the applicable law might not play some role,since the draftsman of a contract subject to common law, for example, perhaps fear that any penalty clause would be null and void. 41

38 "Thus, in relation to international construction contracts it has been stated: 'therate of deduction for late performance varies with the size, complexity and importanceof the project. As a general guide, the rate is frequently between 0.0001-0.001 per centof the contract price per day. An upper limit is not generally specified, but if one isdesired 5-10% would be reasonable.' Guidelines for Contracting for Industrial Profits inDevelo!Jing Countries (UNIDO publication ID149 and Corr. 1), page 22."

39 Second UNCITRAL Report, pp. 24-25, No. 52.

40 First UNCITRAL Report, p. 11, No. 31, and p. 13, No. 33.

11 !d., p. 14, No. 35. Conversely, contracts subject to the law of a country with aplanned economy frequently contained penalty clauses due to the particular importanceof the performance of contracts with a view to the achievement of the Plan.

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In its second study, UNCITRAL's secretariat related the possibleabsence of a penalty clause to the aforementioned criteria that, actually,favor the insertion of such a clause. Ease or difficulty in proving breach ofthe relevant obligation would appear to play an important role. Thus, apenalty clause seems inappropriate with regard to the obligations of aresearcher under a research contract; such obligations can only be definedin a flexible and evolutive way and their breach cannot be determined inthe same objective way as a delay in delivery.12

The Working Group took note of these considerations and largelyagree with them. Similar observations may be made with regard to certainaspects of industrial cooperation contracts. To use French legal terminology (now also found in the Unidroit Principles, Articles 5.4 and 5.5), itmight be said that penalty clauses are more appropriate with respect to"obligations to achieve a specific result" than concerning "obligations ofbest efforts. "43

The absence of a penalty clause may have two more specific reasons.Sometimes the psychology of negotiation acts as a disincentive to proposing the insertion of such a clause for fear of damaging the good climate byraising the possibility, already at this stage that the contract performancemight be less than perfect. Sometimes too, despite the differences betweena penalty clause and withdrawal payments (clauses de dedit) ,11 there is unwillingness to inform the other contracting party of the price it would have topay in order to purchase its freedom. 4:"i

4. Drafting Technique

The UNCITRAL secretariat also made a number of interesting observations about drafting techniques used in penalty clauses, resulting in particular in the following table:

"Methods adopted to determine the amount of the liquidated damages orpenalty and their- fr-equency:

"By r-efer-ence to a per-centage of the pr-ice of the goods and to anotherfactor, e.g. amount of delay or- extent of deviation fmm agreed standar-ds: 29


43 On this distinction, cf. supra, Chapter 4, pp. 218-222.

11 Cf. SU!JTCl, pp. 236--237.

45 See the observation to this effect in M. Fontaine, Aspects jwidiques des contrats decompensation, D.P.C.I, 1981, 198.

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"By n:fenmce to a peTCentage of the payment due and to anotherfactor; e.g.amount of delay in payment: 18

"By refenmce to a pen:entage of the value ofgoods delayed in delivery andto the extent of delay: 15

''Amount ofpenalty undetermined in contract form, and to be fixed by parties: 9

"By reference to the rate of interest usual for delayed payment in a particular country and the extent of delay: 8

"By reference to the weight or quantity of goods and to the extent ofdelay: 4

"By reference to a percentage of the cost of defective goods and the extent ofdeviation from agreed standards: 4

"By reference to a percentage of the difference between the market price andthe contract price: 2

"By reference to a sum which, if not paid, would enable the defaulter tomake a profit out of the default: 1. "46

The First UNCITRAL Report also emphasizes the adverse effect, as tothe effectiveness of the penalty, of the occasional stipulation that makespayment of the penalty dependent upon proof of actual loss or damages.47

The Second UNCITRAL Report provides a certain amount of additional information about the manner of payment of the penalty (direct payment, relinquishment of a sum due, recourse to a bank guarantee)48 andabout the contractual treatment of the problem of the imputability of thebreach to which the sanction relates.19

These findings of UNCITRAL are largely borne out by the researchwhose results are set forth in the first part of this chapter. However, ouranalysis brought to light other frequent or, at the very least, characteristicfeatures of techniques for drafting penalty clauses in international con-

46 First UNCITRAL Report, pp. 12-13, No. 32; see also p. 14, No. 38.

47 Id., p. 14, No. 39. Cf. above pp. 309-310.

18 Second UNCITRAL report, pp. 8-9, Nos. 17-18.

49 Id., pp. 10-12, Nos. 21-27. The Second UNCITRAL Report also considers theproblems of combining a penalty, on the one hand, with performance or additionaldamages, on the other. (Cf. infra, pp. 346-349).

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tracts. Reference is made, in particular, to the details and illustrations provided with regard to granting grace periods or tolerance margins, the fixing of maximum amounts and overall maximum amounts, the widening ofthe basis of assessment in the event of indirect damage, the possible remission or reduction of penalties, the combination of penalties and bonusesin an incentive system, etc. No doubt, these features were not worth raisingin the context of UNCITRAL's work, directed as it was towards the preparation of a uniform law. But they are worthy, it seems to us, of the attentionof practitioners called upon to negotiate the drafting of sophisticatedpenalty clauses.

The 1. C. C. Guide on Penalty and Liquidated Damages Clauses also has drafting advice that coincides with the analyses and recommendations of thischapter. The following ICC recommendations deserve special mention:

''Any clause should clearly indicate whether it intends only to assess actualdamages for br-each or whether it intends to encourage performance by providing a private penalty as a deterrent against breach where the penalty provides for additional payments to be made on top of damages;

''Any clause should clearly indicate whether it is exclusive or optional (i.e.,whether" or not it may be combined with other" remedies, particularly with termination for breach and payment of damages);

''Any clause should clearly indicate whether" its lump-sum character impliesthat its drafters were envisaging that the lump-sum was a provisional ora final assessment offuture damages. '50

III. LEGAL ANALYSIS

Some aspects of the drafting of penalty clauses may safely be left tofreedom of contract, irrespective of the applicable law; the stipulation ofa grace period is an example. An informed negotiator may merely choosefrom among the technical methods available, while obviously looking carefully at the quality of the drafting.

But other questions are more delicate because they call into questionprinciples of the law relating to liability, and there the applicable law may laydown binding rules. The relationship between the compensation stipulatedand the actual loss or damage is rarely a matter of indifference; a discrepancymay result in the penalty being reduced or declared invalid. Generally speaking, national law has something to say about the possible combination of apenalty and specific performance or additional damages. These problems

50 I. C. C. Guide on Penalty and loiquidated Darnages Clauses, pp. 18 and 25-26.

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must be mentioned. In the first place, however, their field of applicationneeds to be defined; that is what the expression "penalty clause" mean. 51

There is a series of similar situations, marginal or doubtful, and it is important to lay down some guidelines: the rules applicable to penalty clauses, inprinciple,52 do not apply to stipulations of a different kind..G':\

A. Penalty Clauses and Similar Clauses54

1. Penalty Clauses and Clauses "for Winding Up the Contract"

Clause 9 of a hire purchase contract grants the hirer the power to terminate the arrangement before the agreed term; clause 10 allows theowner to bring the contract to a premature end in the event that the hireris in breach of his obligations or goes bankrupt.

Clause 11 provides as follows:

"Upon termination of this agreement pursuant to clause 9 or 10hereof ... the hirer ... shall pay to the owner the hire purchaseprice of the goods less the aggregate of

"( 1) the sums previously paid under the agreement;

"(2) the sums due under the agreement (including any sums recoverable from the hirer under 5 hereof) up to the date of termination;

"(3) the net proceeds of sale of the goods if repossessed and soldor if not, their value as determined by a dealer appointed by theowner and

"(4) a discount for the acceleration of payment computed according to the direct ratio or 'rule of 78' method.

"For the purposes of this clause 'the net proceeds of sale' shallmean the proceeds of sale after deducting the cost and expensesof repossession storage insurance and sale.

51 At the beginning of this review, a penalty clause was defined as "a clause stipulating payment of a sum of money in the event of non-performance of a contractual obligation" (Cf. supra, p. 300).

52 Compo A. Pinto-Monteiro, Of}. cit., p. 746, who claims that liquidated damagesclauses may also be modified on grounds of equity.

53 Other problems could be examined, such as the fate of penalty clauses when thecontract is terminated (cf. Liege,jan. 15, 2001,journ. Trib., 2001, p. 311). This is relatedto penalty clauses possibly belonging to obligations "surviving termination" (d. ir~fra,

Chapter 13).

51 Cf. D. Mazeaud, I~a notion de clause penale, Paris, L.G.DJ., 1992.


"If the net proceeds of sale of the goods repossessed and theamount paid by the hirer pursuant to this agreement exceed in theaggregate the amount of the hire purchase price (with interest onoverdue instalments and other sums payable by the hirer underclause 5 hereof) the excess shall be repaid to the hirer."

Such a clause is not a penalty clause. In the first place, it does not necessarily lay down a sanction for a contractual breach: the clause applies, inparticular, when the hirer terminates the agreement or when the agreement is terminated as a result of the hirer's bankruptcy. Secondly, theclause does stipulate down compensation in the form of a lump sum, butsimply sets out the basis on which the re-payment will be calculated.

2. Penalty Clauses and Withdrawal Payments (Clauses de Dedit)

In some contracts, one party reserves the right to release itself from itscommitments in return for a sum of money. Accordingly, that party has agenuine option. The other party to the contract cannot call this into question, for example, by purporting to enforce the undertaking in question.Such withdrawal payments (indemnites de dedit) are not remedies for contractual breaches; they reflect the exercise of an agreed choice.55

Such an indemnity is clearly distinct from a penalty clause, at least intheory. In practice, it may be difficult to draw the distinction. Some authorities have rightly pointed out that the aims pursued by such clauses are verysimilar to those of penalty clauses.56

The following example of a withdrawal payment is taken from theSecond UNCITRAL Report:

"It is further agreed that this arrangement and all rights and obligations hereunder may be terminated by (Seller) at any time for anyreason which it, in its sole discretion, deems desirable, provided,however, that, except in the case of default in performance byDistributor, Seller gives at least 30 days notice of its intention to doso to Distributor. Commission earned during the notice period, ifand when notice is required, shall be liquidated damages resultingfrom said termination."s7

55 Cornp. D. Franc;oIl, oj). cit., p. 481.

56 D. Franc;;on, id.; First UNCITRAL Report, p. 5, No.9.

Mention may also be made of the doctrine of "efficient breach," under which a contract obliges a party eitherto effect performance oTto pay damages if performance provesless profitable. See, for instance, Ch. J. Goetz & R.E. Scott, Liquidated Damages,Penalties and the Just Compensation Principle: Some Notes on an Enforcement Modeland a Theory of Efficient Breach, 77 Col. Law Rev., 1977, pp. 554-577; B. Rudden, Latheorie de la violation efficace, Rev. Int. Dr. Comp., 1986, pp. 1015-1041.

57 Second UNCITRAL Report, p. 10 No. 19.


Despite the use of the expression "liquidated damages," the commission payable does not constitute a penalty for breach, but the price paid forexercising the option of termination.

Another clause, (also called dedit, the terminology varies), more closelyresembles a penalty clause insofar as it lays down a sanction for a genuinebreach of contract. Under such a clause, sums already paid by the debtor,by way of account or security, are retained by the creditor in the event ofnon-performance. 58 The analogy with penalty clauses is clear if the relinquishment of the sums in question constitutes flat rate compensation andnot an indemnity to be taken into account when assessing damages theamount of which remains to be established. In the case of a lump-sum payment, it is worth mentioning the peculiar feature that the payment of the"penalty" precedes the breach for which it is intended to be a sanction.59

This situation in which the party in breach relinquishes a sum, which it hasalready paid, should not be confused with the one in which payment under thepenalty clause is carried out by offsetting sums owed by the creditor. fio

3. Penalty Clauses and Price Adjustment Clauses

Clauses providing for a penalty for a delay in carrying out an obligationor for inadequate performance as compared with the guarantees given,often provide for a scale of penalties, calculated as progressive percentagesof the amount of the price. 6 ]

But are penalties invariably involved? Is it not conceivable to have a system under which the price varies in accordance with the delivery time andthe quality of performance obtained? This analysis can also cover situationsin which the contract provides not only for "penalties" but also for "bonuses"in the event of early performance.62

It is quite difficult to establish a distinguishing criterion. In theory, inthe one case the clause penalizes a breach of contract, whereas, in theother, the supplier has a genuine option to deliver a variable quality at hisdiscretion (obviously within certain limits) and this is reflected in the price.

In international contracts, the parties' intention is undoubtedly betrayed by the fact that, in general, such clauses expressly refer to the con-

58 P. Ellington, Of}. r:il., pp. 507-514; First UNCITRAL Report, p. 5, No. 11.

59 Such clauses will be examined further below at pp. 340-341.

60 Cf. supra pp. 310-311.

61 Cf. SLlfJTfL pp. 304-305 and 319-321.

62 Cf. supra pp. 314-315 and 322-323.


cept of "indemnity" or "penalty." If this were to be combined with othersanctions, this interpretation would be reinforced. 63 Additional evidencemight also be found in the possible deterrent nature of the increases.

4. Penalty Clauses and Judicial Penalties (Astreintes)

The distinction between penalty clauses andjudicial penalties (astreintes)has brought about a split between some members of the Working Group.The question arises where the penalty clause provides for the payment ofprogressive indemnities for delay.

As far as some of the French and the Belgian members are concerned,there is no question of confusing such a clause with an astreinte. Admittedly,an astr-einte also constitutes a progressive penalty for delay. But it is a penaltyimposed by the court as a sanction for delay in carrying out the judgment,and it is necessarily in the nature of a deterrent. Astreintes do not constituteagreed upon sanctions. 64

However, other French members of the group consider that when thecontractual stipulation of progressive compensation for delay is in thenature of a threat, this constitutes "contractual astreinte" and not a penaltyclause. 65 The point of this analysis is that if the clause is interpreted in thismanner, it would fall outside the courts' power of revision as provided forin Article 1152, paragraph 2, of the French Civil Code.

Without doubt, the origin of this controversy is to be found in the useof the term" astreinte" in some contracts drawn up in French. But thedenomination used by the parties in not decisive in law. It would certainlynot be sufficient to name a penalty clause an "astreinte," in order to escapethe application of binding legal rules.

5. Penalty Clauses and Clauses Limiting Liability

The discussions, about which penalty clauses have given rise, in recentyears in the various countries have brought to light two of the main functions of such clauses: the indemnifying function and the deterrent function. Sometimes it is a question of providing in advance for a flat-rate sumthat will adequately make good the damage resulting from any failure toperform; sometimes the clause threatens the debtor with a veritablepenalty, unrelated to the damage, that can provide it with an incentive to

63 The characteristics of the clause quoted at supra, pp. 314-315 above (referred toin note 19) also suggest that it is, in fact, a penalty.

61 For a more detailed comparison, see 1. Moreau-Margreve, L'astreinte, Ann. Fac.Dr: Liege, 1982, pp. 47-51.

65 See in particular D. Franc;;on, op. cit., p. 481.


perform or punish it in the event of a default. Notoriously, in some countries, this alternative will make the clause subject to reduction, if not a declaration of nullity.66

Examination of practice brings to light a third-very frequent-function of penalty clauses. When they are inspired by the obligor himself, theyare a means for him to limit his liability. Examples have been provided inwhich the compensation was limited to a given ceiling (often capped by aglobal ceiling) and clauses where the limitation related to the basis forassessing the penalty (cf. the liability of the consulting engineer, which waslimited, not to a percentage of the value of the works, but to the amountof its fees).67 UNCITRAL has already stressed the frequent role played bypenalty clauses in this area. 68

Sometimes this function is very explicit. In a contract considered by thegroup, it was set out in a specific paragraph of the "Contractor's Limit ofLiability" clause, which was separate from the "Liquidated Damages" clauseitself. The paragraph in question was worded as follows:

"Contractor's only liability with respect to time of performanceshall be the payment of the liquidated damages specified in Article11, limited to the maximum amount of U.S. Dollars 750,000 (sevenhundred and fifty thousand)."

How, in these circumstances, can a penalty clause be distinguishedfrom a clause limiting liability?69

In principle, the difference is that the penalty clause establishes a flatrate amount, whereas a clause limiting liability fixes a ceiling below whichthe amount of compensation generally still has to be determined. 7o Here isan example of such a clause:

"Au cas ou, pour des motifs imputables au fournisseur, l'executiondes prestations contractuelles deviendrait impossible, dans sa totalite ou partiellement, Ie client serait autorise ase desister du contratou a demander des dommages-interets. Le taux des dommagesinterets sera limite a10% du prix convenu pour les prestations nonexecutees par suite de I'impossibilite survenue dans ces conditions."

66 This question will be taken up atinjra, pp. 342-346.

67 Cf. supra, p. 365.


69 On such clauses, cf.in:fra, Chapter 7, and especially p. 355.

70 See to this effect, the First UNCITRAL Report, pp. 5-6, No. 12.


But certain shades of difference have to be taken into account. Thepenalty clause may lay down the basis for calculating a lump sum, whichmay vary according to the circumstances (for example, an amount per dayof delay) and, if so, may be coupled with a ceiling. Nevertheless, such a stipulation continues to be in the nature of a penalty clause, since the determination of the compensation is still based on a pre-determined, flat-ratefoundation. On the other hand, if the clause limiting liability is generallylimited to laying down a ceiling, there is nothing to prevent the two techniques from being combined and a limited indemnity being determinedon a flat-rate basis. In this case, there will be both a penalty clause and aclause limiting liability; this is true of the first example referred to.

Consequently, numerous penalty clauses can be clearly distinguishedfrom clauses limiting liability and vice versa, but there are stipulations thathave a dual nature. They may be identified on account of their having, atthe same time, a flat-rate and a restrictive nature.

When a penalty clause also limits liability, its validity must be assessedin a specific manner. We shall be returning to this subject.71

6. Penalty Clauses and Penalties Not Consisting of an Obligation to Pay aSum of Money

A penalty clause stipulates, in principle, payment of a sum of money bythe party in default. At least, this was the definition that we adopted on aprovisional basis at the beginning of this study.72 But is it essential that itshould have this characteristic in order to continue to be a penalty clause?

Two other types of sanctions appeared in the Group's sample. In onecase, failure on the part of a licensor to pursue counterfeiters resulted inthe suspension of the payment of royalties. 73 The other case was one inwhich a manufacturer causing the delay had to deliver components inkind that the factory should have manufactured. 71 Mention should also bemade of the situation with regard to liquidated damages clauses in whichthe sanction consisted in the debtor relinquishing sums which he had paidin advance.7s

71 Cf. infra, p. 346.

7'2 Cf. SUfJTCl, p. 300.

73 Cf. supra, p. 326.

71 Cf. supra, p. 311.

75 Cf. SUfJTCl, pp. 336--337.

Following UNCITRAL (First Report, p. 5, No. 10), the group also considered "accelerated payment" clauses, under which the debtor is obliged to repay the balance at an


Can this range of sanctions still be described as penalty clauses, possibly subject to binding legal rules?

The solutions adopted nationally differ. The Swiss Code of Obligationsdoes not specify the nature of the penalty, but rules that "provisions relating to the penalty clause shall be applicable to an agreement by which partpayments made are to be acquired by the creditor in the event of termination" (Article 162). Other legislation is broader. Under German law, apenalty consists in principle of the payment of a sum of money (BGB,Section 339), but the rules apply, mutatis mutandis, when "another performance" was promised (Section 342).76 Under the French Civil Code, "apenalty clause is a clause whereby a party ... undertakes to do somethingin the event of non-performance" (Article 1226). Belgian law has modifiedthis provision, which now refers to payment of a flat-rate indemnity. TheItalian Civil Code refers to the debtor's undertaking to carry out "a certainperformance" (Article 1382). It would appear that a penalty does not necessarily consist of a sum of money in either English77 or Spanish78 law.

The applicable law is therefore not a matter of indifference. It mayaffect penalty clauses, not only clauses providing for the payment of a sumof money, but also, depending on the case, clauses providing for the relinquishment of sums of money or even for any other performance. Draftsmen of such clauses will be conscious of this when the law of the contractsubmits penalty clauses to binding rules.

International initiatives designed to regulate penalty clauses haveresulted in different positions being adopted. The recommendation of theCouncil of Europe covers only the payment of a sum of money (Article 1).The broader Benelux Convention refers to "payment of a sum of money orany other performance" (Article 1). UNCITRAL restricts the scope of itsuniform rules to stipulations providing for the payment or the relinquishment ofa sum of money (Article 1). Consequently one form of liquidateddamages, but not non-pecuniary performance, is covered. 79 The UnidroitPrinciples only refer to payment of a "specified" sum (Article 7.4.13), as dothe Principles of European Contract Law (Article 9:509).

earlier date in the event of default. In themselves, the sums reimbursed are certainly notpenalties, since they constitute the very object of the obligation. But the sanction liesin the disadvantage for the debtor of losing the benefit of the term; this disadvantagemay not be equated with a penalty clause since it is not of a flat-rate nature.

76 Cf. M. Strauch, op. cit., p. 499.

77 P. Ellington, Of}. cit., p. 507.

7S B. Cremades, op. cit., p. 463.



B. Whether the Clause May Be Declared Null and Void or Revised

(a) The most critical legal problem with which the draftsman of apenalty clause in an international contract has to grapple is the questionwhether a clause providing for an excessively severe sanction may beannulled or at least cut back.

1. Most national legal systems empower the courts to review excessive penalty clauses to a greater or lesser degree. In some cases,clauses not designed to be purely in the nature of an indemnity areannulled (England, Scotland,so Ireland,sl United States); in others, thecourts are entitled to mitigate a penalty deemed disproportionate tothe extent of the loss or damage (Germany, France, Belgium,82Luxembourg,S3 Switzerland, Italy, the Netherlands, Portugal, Algeria,etc.).81 For more detail, the reader is referred to the monographs onnational law drawn up by members of the Working Group as citedabove. s:) In principle, such provisions are binding and likely to affect

80 H. Schelhaas, of}. cil., pp. 1397-1399.

/;1 K. Hoy, Penalties and liquidated damages clauses in England and Ireland, inStructuring international contracts, D. Campbell (ed.), The Hague, Kluwer Law International, 1996, pp. 243-251.

82 Articles 1226 and 1231 of the Belgian Civil Code, as modified by the Law ofNovember 23, 1998. This reform prohibits penalty clauses of a deterrent nature andempowers the judge to reduce amounts that are excessive in relation to the foreseeabledamage. With this modification, Belgium occupies an intermediate position betweencommon law countries (nullity of deterrent clauses, validity of clauses of liquidated damages) and most civil law countries. (validity of clauses of both kinds, judicial review ofexcessive amounts); d. H. Schelhaas, op. cit., pp. 1412-1413.

83 Law of March 15, 1987 cited by D. Philippe, Autonomie et controle des clausescontractuelles dans les relations entre professionnels, in Le droil des arfaires en evolulion,L'enlrefrrise el son dienl:un f}arlenarial mnslructif, Association beige desJuristes d'Entreprise,Brussels, Bruylant, 1997, p. 213.

81 Note also that, under French law, the courts may increase a penalty deemed to bederisive (Civil Code, Article 1152, paragraph 2); see D. Fran<,;on, Of}. cil., p. 481.

sri See the references in supra, note 2, as well as the description of various legal systems in the Le.e. Guide, op. cit., pp. 27-51. The Unidroit Principles accept penaltyclauses ("agreed payment for non-performance") of both natures (indemnity and deterrent), with, a f}osleriori, judicial control. The specified sum may be reduced to a reasonable amount where it is grossly excessive in relation to the harm caused resulting fromthe non-performance and to other circumstances (Article 7.4.13; d. MJ. Bonell, Policingthe international commercial contract against unfairness under the Unidroit Principles,3 Tulane.r Inl'l Cornf). Law 1994, 83-85; D. Tallon, Les dommages-interets dans lesPrincipes Unidroit relatifs aux contrats internationaux, in Conlralli mrnmen;iali inlernazionali e Principi Unidmit, MJ. Bonell & F. Bonelli (eds.), Milan, Giuffre, 1997, pp.303-304). The Principles of European contract law have a similar provision (Article9:509); the notes accompanying this article give references to the legal status of penaltyclauses in European Union countries (d. Princif}les ofEum!}ean Conlract Law, O. Lando &

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penalty clauses inserted in to contracts governed by the laws in question86, but not necessarily the contracts themselves. 87

2. Are these solutions covered, however, by international public policy?

No firm answer seems to be available yet to this very delicate question,as there is little case law. First, three positions from French and Belgianauthors can be noted.88 As far as Professor Mercadal is concerned, Article1152, paragraph 2, of the French Civil Code, which provides that excessivepenalty clauses may be reduced, comes under French international publicpolicy; that view is based on the equitable nature of the provision, in accordance with the requirements of international trade, and on the fact that itis in conformity with the majority of foreign solutions. 89 Conversely, Mr.Franc;on considers that a French court would generally adopt a more moderate approach towards a penalty clause included an international contractthan it would in case of a domestic contract, leaving aside certain specificcircumstances.9o As for MJ. Thilmany, he considers that the solutions inquestion do not fall under Belgian international public policy; the principle of the prohibition of civil penalties has indeed become less rigoroussince astreinte was introduced in to Belgian law.91

As far as case law is concerned, the Working Group was informed ofonly four decisions. An English court did not find that English law covering "penalties" fell under English international public policy (if this terminology may be used in English law) .92 In contrast, a German decision93

and a Swiss decision94 held that the possibility of cutting down excessive

H. Beale (eds.), the Hague, Kluwer Law International, Parts I and II, 2000, pp. 455-456).

S6 However, also note that in German law, by virtue of Sections 348 and 351 of theCommercial Code, penalty clauses applicable to a "Vollkaufrnann" may not be cut down(see M. Strauch, op. cit., p. 499).

87 In many legal systems, penalty clauses can be separated from the contract. Forinstance, under the common law, nullity of the penalty does not result in avoidance ofthe contract, with the consequence that damages can still be awarded. A contractual "severability" clause can help save the contract when the penalty clause is void; on suchclauses, d. sUfJTa, pp. 167-176.

ss See also M. Strauch, op. cit., p. 499, who raises a similar but not identical problemwith regard to Section 344 BGB.

89 B. Mercadal, L'article 1152 al. 2 du Code civil est-il d'ordre public internationalfran<;:ais? D.P. C.l, 1979, pp. 285-289.

90 D. Fran<;:on, op. cit., p. 481.

91 J. Thilmany, op. cit., p. 447.

92 Godard v. Gray [1870] L.R.6.QB 139; P. Ellington, ofl. eil., p. 507.

93 OLG Hamburg, December 23, 1902, SeuJIerts Archiv, 1902, 63.

91 Trib. Fed., February 25, 1915, Rec. Off Vol. 41, II, 138.


penalty clauses, as provided by the Codes of those two countries, was amatter of international public policy. These three decisions are relativelyold, however.

More recently, the Paris Cour d'Appel held that a penalty clause governed by English law, which had been chosen by the parties, was applicable even though English law did not allow the courts to diminish such aclause; in the case in point, application of the clause was not held to becontrary to French international public policy on the grounds that it itselfprovided for the penalty to be contractually mitigated.95 One commentator considers that, a contrario, had that possibility not existed, the courtwould have disregarded the foreign law that deprived the court of anypower of mitigation. 96

The solutions adopted are still uncertain. Moreover, any generalizationwould be dangerous, because of the differences between national laws andthe importance the courts will attach to the degree of connection of thecontract at hand with the national legal system.

3. Are pains taken, in practice, to avoid to the use of penalty clausesliable to be annulled or cut back? The answer to this question is also difficult. While the Group found numerous clauses in which the penalties provided for seemed to be closely aligned with the actual damage, it wasunable to recognize definitely "excessive" clauses in the other part of itssample. In fact, it is very difficult to identify such clauses when they areexamined out of context. UNCITRAL made the same finding. 97

Neither is the terminology used any more enlightening. In particular,the expressions "liquidated damages" and "penalty" are often used indiscriminately, even though these expressions determine whether the clausein question will be found valid or invalid under common law.98 An example of this confusion follows:

"Section 15. Liquidated Damages.

"This shall comprise the following and be paid in foreign currency.

"15.1. Delay Penalty ...

"15.2. Performance Penalty ..."

95 Paris, December 22, 1983, Rev. Crit. Dr. Int. Prive, 1984, p. 484.

96 J. Mestre, note, id., pp. 490-49l.

97 First UNCITRAL Report, p. 14, No. 36; Second UNCITRAL Report, p. 6, No. II.

98 P. Ellington, op. cit., pp. 507-514; B. Hanotiau, op. cit., pp. 515-524.

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Clearly, the court is not bound by the terminology chosen by the parties.

4. Could the parties effectively couple a penalty clause with wordingdesigned to guard against its annulment or risk of being reduced?

Three examples from the Second Report of UNCITRAL's secretariatmay be cited:

"In the event the said liquidated damages are held by a Court ofcompetent jurisdiction to be unenforceable for any reason whatsoever, it is hereby agreed and expressly declared that the aforesaidamounts shall be penalties."99

That clause is surprising if common law is applicable to the contract(which is possible since the clause is taken from the sales contract concluded between a North American company and a foreign firm); in principle, the sanction is valid if it actually consists of liquidated damages,whereas penalties are null and void.

• "The rates of agreed and liquidated damages shall not be increasedor decreased by arbitration." 100

• "The contractor is obliged to pay a penalty to buyer that cannot bereduced by any legal procedure."lOl

The usefulness of such stipulations is questionable. The provisionsfrom which the parties intend to derogate are, in principle, binding. Thequestion remains whether or not they are covered by the international public policy of the forum. 102

(b) The validity of a penalty clause may also be affected by the provisions of the applicable law relating to standard form contracts or unfaircontract terms. Several of the monographs on national law allude to this.Specific reference is made to the French law ofJanuary 10, 1978 and itsimplementing decree of March 24, 1978,103 the British Unfair ContractTerms Act 1977,104 the German law of December 9,1976 on general contractual conditions,105 Section 2-302 of the American Uniform Commercial


100 !d., p. 21, No. 48.

101 Id., p. 21, No. 48.

102 Cf. supra, pp. 343-344.

103 See D. Fran<,;on, Of}. cil., p. 481.

104 P. Ellington, op. cit., p. 507.

10,j M. Strauch, op. cit., p. 499.

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Code as regards the doctrine of unconscionability106 and the Spanish lawofJuly 23,1908 on usury. 107 Such regulations may have evolved and othershave appeared since those studies were published (the German law on general conditions, for instance, is now incorporated in the BGB). In theEuropean Union, much harmonization has derived from the Directive ofApril 5, 1993 on unfair terms in consumer contracts.

Some of those provisions are principally concerned with contracts concluded with non-businessmen or consumers, but this is not invariably thecase and problems of interpretation exist. Penalty clauses in internationalcontracts could occasionally come under legislation of this type.

(c) Lastly, another type of problem as to the validity of penalty clausesresults from the fact that they are frequently used as clauses limiting liability, as observed above. lOB There are restrictions on the validity of the lattertype of clauses in most national legal systems, for example, in the case offraud or gross negligence or where the limitation is such that it underminesthe substance of the obligation. We shall be returning to this subject in alater chapter. 109 Here too, negotiators of contracts must be careful. If thepenalty clause acts as a clause limiting liability, it will also be subject to therules governing the latter type of clause, depending on the applicable law.

C. Combination of Remedies

It has transpired from the analysis of clauses that, in some cases, payment of a penalty is stipulated to be capable of being combined with otherremedies, such as retention of the obligor's duty to provide specific performance, suspension of the counter-performance, the possibility for theobligee to terminate the contract or the award of additional damages. I 10

Is such an accumulation of remedies legally valid?

It is indispensable to consider the applicable law, since there arenumerous differences.

(a) As regards combining a penalty with specific performance, somelegal systems distinguish between a penalty imposed specifically for non-performance, which may not be used in combination (see, for example, Article1229, paragraph 1, of the French and Belgian Civil Codes and Section 340

106 B. Hanotiau, op. cit., p. 515.

107 B. Cremades, of). cit., p. 463.

lOS Cf. supra, pp. 338-340.

109 Cf. infra, pp. 382-388.

110 Cf. SUfJTCl, pp. 311-314 and 321-322.

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of the German BGB), and a penalty clause relating to delay or defective performance, which may be combined with a right to claim proper performance (Article 1229, paragraph 2, of the French and Belgian Civil Codes;Section 341 of the German BGB).I ll In the first situation, Article 1153 of theSpanish Civil Code adopts the same solution, in principle, which looks unfavorably upon any combination, but agreement to the contrary is expresslyauthorized. 1l2 In contrast, some past legislation from Central Europe, specially designed to take account of the needs of international trade, was favorable to the principle of combining penalties and specific performance(Article 192 of the Czech Code of International Trade; Article 304(1) of theEast German law on international economic contracts) .113

Manifestly, these few examples cannot exhaust the multiple facets ofthis problem in comparative law, but they are enough to illustrate the definite divergences that are encountered when dealing with the problems ofaccumulation of remedies. UNCITRAL's work with a view to drawing upthe text of a uniform law came up against the same divergences; they gaverise to considerable discussions within UNCITRAL itself and promptednumerous differing reactions from governments. 111 It is possible to endorsethe opinion of the UNCITRAL secretariat, which considers that many difficulties of interpretation may be avoided by analyzing the function of theclause: did the parties see it as substitute for performance or as a means ofcompensating for losses incurred pending proper performance?1l5 From

111 J. Thilmany, of). cil., p. 286; D. Fran<;:on, Of). r:il., p. 481; M. Strauch, Of). cit., p. 499.

112 B. Cremades, ap. cit., p. 463. Sections 340 and 341 of the BGB would also not seemto be a matter of public policy according to German commentators (see M. Strauch, ap.cit., p. 499).

1B The problem of combining penalties and specific performance clearly arises indifferent terms under common law where, in principle, specific performance is notgranted (see P. Ellington, ap. cit., p. 507).

114 See Doc. A/CN.9/219 of 28 May 1982, Nos. 26-30, and Doc. AIAC.9/2191Add.,of 23June 1982, No.7.

The end result of the uniform rules is a subtly qualified text:

"Article 6:

"(1) If the contract provides that the obligee is entitled to the agreed sumupon delay in performance, he is entitled to both performance of theobligation and the agreed sum.

"(2) If the contract provides that the obligee is entitled to the agreed sumupon a failure of performance other than delay, he is entitled either to perfonnance or to the agreed sunl. If, however, the agreed sum cannot reasonably be regarded as compensation for that failure of performance, theobligee is entitled to both performance of the obligation and the agreedsunl."

m Second UNCITRAL Report, p. 17, No. 39.


this angle, combining compensation for delay and specific performance,for instance, would seem to be generally permitted. I )(j

(b) On similar grounds, the imposition of penalties for delay seems tobe compatible with the option often reserved by the obligee to terminatethe contract, in whole or in part, if the delay becomes prolonged. The tworemedies are not concurrent; they succeed each other in time.

(c) The suspension of correlative obligations may also be validly combined with the stipulation of compensation for delay. The defense of nonperformance is only a provisional measure. It is a defense plea open to theobligee but not a mode of compensation, it does not play the same role asa penalty.

(d) What about the case where a penalty is combined with additionaldamages imposed for the same breach? At first sight, such a combinationwould appear to conflict with the flat-rate nature of the penalty clause.Article 1152 of the Napoleonic Civil Code, in its original version (this provision has been modified in France and abrogated in Belgium), debarredthe courts from granting such additional damages.I 17 Such a combination isalso not allowed under English law. IIB But different solutions are adopted inlegal systems, which are not bound by a strictly compensatory concept ofpenalty clauses, despite the possible infringement on the useful nature offlat-rate penalties. The new Article 1152 of the French Civil Code enablesthe court to increase a manifestly derisive penalty clause.1l9 In Spain, a combination may be agreed upon by contract.I 20 In Germany (BGB, Section340) 121 and Switzerland (Article 161 (2) of the Code of Obligations, provided that fault on the part of the obligor is proved), the obligee may obtainadditional damages if he proves that he has sustained a higher degree of lossor damage. This solution is also adopted in UNCITRAL's uniform rules(Article 7), provided that the loss alleged is "substantially" higher. 122

116 See to this effect the Hungarian arbitration award cited in the Second UNCITRALReport, p. 31, No. 67.

117 See, however, the case law cited byJ. Thilmany, Of). cil., p. 287, and the distinctionintroduced by it in order to justifY certain such combinations. For France, see the reviewby B. Mercadal, in D.P. C.I., 1980, 88.

118 P. Ellington, op. cit., p. 507.

119 D. Fran<;:on, of). cil., p. 481; see also, p. 433, this commentator's arguments in connection with a particular interpretation of the concept of" astreintes."

120 B. Cremades, op. cit., p. 463.

121 M. Strauch, Of). cil., p. 499.

122 The Benelux Commission (Article 2(2)) and the recommendation of the Councilof Europe take the opposite approach.


It is obvious, the various legal systems are very divided in this respect123

and draftsmen of clauses must pay attention to that. A penalty clause stipulated in a contract clearly does not have the same implications if it callsfor a definitive lump-sum payment or if it provides an increase by awardingadditional damages. It is important to be aware of the solution adoptedunder the applicable law, and, if need be, to modifY it by contract when thesolution is not mandatory.

Moreover, the problem warrants consideration from a specific anglewhen the penalty clause acts as a clause limiting liability. In such a case, thegrant of additional damages seems to be precluded, unless the clause contravenes the principles of the applicable law covering the validity of limitation clauses. 121

IV. CONCLUSION

The subject of penalty clauses has proved to be a particularly vast one.The very concept of a penalty clause is difficult to tie down. There are similarities with numerous similar mechanisms: clauses "for winding up the contract," liquidated damages clauses, price adjustment clauses, "astn:intes," etc.A penalty clause may play various roles and, as a result, come under different rules: functions as a threat, as an indemnity, as limiting liability. Delicateproblems can arise with regard to combining penalty clauses with specificperformance, termination of the contract and the grant of additional damages. The national legal systems often display marked divergences withregard to these aspects and their mandatory provisions may cause some contractual stipulations to be invalid. Furthermore, analysis of penalty clauses,in practice, shows the great wealth of procedures are available to adapt thedrafting of penalty clauses effectively to suit the intended aims, the type ofcontract and the nature of the obligation to which they relate.

123 For a broader comparative study, cf. T. Segre, Clause Penale et dommagesulterieurs en droit compare, Rev. Ini. Dr; CmnfJ., 1970, pp. 299-311; see also the generalreferences to comparative law with regard to the penalty clauses cited sufJTa, p. 299-300;see also the few decisions cited in the Second UNCITRAL Report, p. 31, No. 68.

121 Concerning the mechanism ofjudicial increase of derisive limitation clauses, cf.Ph. Malinvaud, De I'application de I'article 1152 du Code civil aux clauses limitatives deresponsabilite, in L'avenir rlu droit, Melanges en hmnrnage rL Francois Terre, Paris, Dalloz,1999, pp. 689-700.

Mimo

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Mimo

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CHAPTER 7

LIMITATION OF LIABILITY ANDEXEMPTION CLAUSES

I. INTRODUCTION

The importance of clauses limiting or excluding liability does not haveto be demonstrated.

The firm, which sells its products or services, has to face important risksif these products or services prove faulty, or if their performance is unsatisfactory. The warranties and liabilities, which it may have to face, are likelyto result in heavy debts-often out of proportion with the importance ofits breach or the profit expected from the contract (in many legal systems,the slightest default entails the obligation to indemnity the prejudice fully).In international contracts, such dangers are increased by a greater probability of failure and sometimes also by a lesser knowledge of the foreignlegal principles that will govern indemnification.

To limit the scope of the warranty or liability by means of special termsbrings indisputable advantages. l The obligor discards certain risks, or itmakes them foreseeable and bearable. Such limitation of liabilities is sometimes a necessary condition to the performance of especially risky ventures;it can allow innovation and technical progress. It is often required to makethe risk insurable, or at least to render the cost of insurance bearable. 2 Itmay also benefit the other party in the form of a price reduction.

However, there is a darker side to the picture. Limitation and exemption clauses can become abusive when they lead to exaggerated irresponsibility or when they deprive the aggrieved party of lawful remedies. Suchconcerns have appeared in most legal systems, and the validity of suchclauses is limited everywhere. This only increases the interest of our study.

About 150 clauses have been gathered and examined for the presentstudy. These clauses were found in various international contracts. Sales

1 The technique of limitation and exclusion clauses can be compared to the limitations implemented in economic activities through limited companies.

2 Such motives also inspire legal limitations of liability such as those provided bymost international conventions for the carriage of persons and goods (see e.g., theC.M.R. Convention, Art. 23-25).

351


and construction contracts are represented, but the sample also containedclauses from other types of contracts, such as loan agreements, agency,renting agreements, counseling, patent or software licensing as well asshare transfer agreements.

We shall study first the concept of the limitation or exemption clause,comparing it with closely related clauses (Section II). We shall then analyzethe main components of such clauses (Section III). The last part shall consist of additional and critical remarks, including questions related to theproblem of validity (Section IV).

A. Notion

The expression "exemption or limitation clauses" calls for someexplanations.

1. Liability and Warranty

The clauses under scrutiny concern either "liability" or "warranty";what is to be understood by these terms?

"Liability" (Tesponsabilite, Haftung) may be defined as the obligation tocompensate for damages caused to another person. This obligation resultseither from failure to perform a contract (contractual liability) or from atort (tort liability). Exemption and limitation clauses most often deal withcontractual liability arising out of the contract where they are provided. Butthey sometimes extend to tort liability.3

"Warranty" (gamntie, Gamntie) , within the present context, refers to thescope of some contractual obligations, especially those borne by the sellerconcerning defects in the goods sold. The seller is liable for such defectsin an objective way, independently from any fault on his part. The lawdefines the consequences of failure to comply with such an obligation ofwarranty (in the French Civil Code, the buyer is offered the choice to cancel the sale or to have the price reduced (Article 1644). The concept offault may reappear if the buyer wishes to go further in his action against theseller (Article 1645, which provides for damages in such a case).

Such is at least the situation in some civil law countries, where warrantyrules are exceptions to the general principle of liability based on fault. Incommon law countries, the situation is different, since all contractual obligations are normally regarded as strict obligations.4

3 Examples will be given infra, pp. 358 and 370; the validity of such clauses will beexamined p. 386.

4 Cf. K. Zweigert & H. Katz, An InlrorI!u;lion 10 CmnfHlralive Law, 3rd ed., 1998, pp.503-504.

Limitation of Liability and Exemption Clauses • 353

In both systems, however, in spite of the difference just pointed out,"liability" and "warranty" do not stand on the same level. The term "liability" covers the consequences of a breach, whereas the term "warranty" basically refers to the scope of an obligation. Yet, every "warranty" impliesconsequences, so that the issues also extend to the level of liability. On theother hand, any set of liability rules is subject to certain conditions, amongwhich the scope of the breached obligation is to be found (a breach mustbe evaluated in comparison with the terms of the obligation). This meansthat there are close links between the two notions. Clauses dealing eitherwith liability or with warranty will thus be examined simultaneously, butcare will be taken to establish the necessary identification.

2. Clauses Relating to Pre-Contractual Statements

In some legal systems, or concerning certain contracts, the law indicates the precise consequences if misrepresentations were made by one ofthe parties at the time the contract was concluded. In English law, theMisrepresentation Act, 1967 stipulates various remedies for such misrepresentations, depending on whether they are fraudulent, negligent or innocent; in some cases, the contract may be avoided and damages granted.s Inmost countries, insurance law provides various remedies for non-disclosureor misrepresentation of fact by the insured, which prevented the insurerfrom evaluating the risk correctly: depending on the case and on theapplicable law, avoidance of the contract, loss of coverage, reduction of theindemnity, change in premiums, etc.6

Such consequences are not really part of the contractual liability, sincethey are remedies to conduct prior to the conclusion of the contract. Butthey, too, give rise to exemption or limitation clauses in some pre-contractual documents and often in the contract itself.

For example, an advertisement for a product contains the followingstatement:

"This information is not to be taken as a warranty or representationfor which we assume legal responsibility nor as permission or recommendation to practice any patented invention without a license.It is offered solely for your consideration, investigation, verificationand shall form no part of any contract with the customer."

5 Cf. Cheshire Fifoot & Furmston's loatL! of Contract, 13th ed., 1996, pp. 273-333.

6 Cf. M. Fontaine, Le droit du contrat d'assurance dans les pays de l'OCDE. Etudecomparative, orientations de lege ferenda, in O.E.C.D., Aspects fondamentaux des assurances,Paris, 1993, pp. 259-301.


A mining contract stipulates:

"AI makes no representation or warranty with regard to the property, completion dates, efficacy or efficiency of the equipment,machinery, plant of processes, production quotas, mine yield orother results of the operation of the Facilities."

Some insurance contracts contain clauses of "incontestability" wherebythe insurer, under certain conditions, agrees not to invoke non-disclosureor misrepresentation by the insured:

• "Le contrat est incontestable des Ie moment de sa souscription,hormis Ie cas de fraude."

• "S'il est specifie dans les conditions particulieres que la Compagniea procede a l'inspection des risques assures au moment de lasouscription de la police, elle renonce a reclamer de plus amplesdetails et ne peut opposer aucune decheance due aI'omission oul'erreur involontaires commises ace moment dans la descriptiondes risques. Toutefois, en cas de constatations ulterieures de pareilleomission ou erreur, l'assure s'oblige apayer les augmentations deprimes qui en resulteraient."

Such clauses related to pre-contractual statements do not seem to havebeen the subject of much attention so far. Should they be subject to thesame rules as limitation and exemption clauses? This question shall be discussed below.7

3. Exemption Clauses or Limitation Clauses

These two types of clauses bring contractual modifications to the rulesof liability or warranty provided by the applicable law.

An exemption clause (clause exonbatoir-e, HaftungsausschlussklauseT:) aimsat suppressing any liability or any obligation of warranty of the relevant party:

"Les delais de livraison sont donnes seulement a titre indicatif etsont fonction des possibilites d'approvisionnement. Ils sont respectes dans la limite du possible. Les retards ne peuvent, en aucuncas, justifier l'annulation de la commande ni une demande dedOllunages-interets. Aucune penalite ne pourra etre appliquee encas de retard, meme en cas de mise en demeure."

A clause limiting liability (clause limitative, HaftungsbegmnzungsklauseT:)does not suppress the liability or obligation of warranty altogether, but it

7 Cf. infra, pp. 387-388.


limits the scope or the consequences of such liability or obligation. Manytechniques are available, which will be examined later. Here is a first example of such a clause, where the limitation concerns the amount of damages:

"The total liability of X and/or the Principals in connection withthe Agreement whether in contract or in negligence or otherwisehowsoever shall not exceed the sum of 100.000 pounds sterlingin aggregate "

B. Comparisons with Certain Similar Clauses

1. Liquidated Damages Clauses

Such clauses are analyzed in another chapter of the present book.s

They usually stipulate the payment of money in case of non-performanceof a contractual obligation. Their first role is to quantify the amount ofdamages in advance, through the stipulation of a lump sum. For theobligee, they offer the advantage of precluding the possibility of any dispute about the existence or the amount of the damages; when theiramount is high, such clauses may also become a means of pressure on theobligor to perform correctly, and a form of penalty in case of breach.9

Clauses limiting liability are, at first sight, quite different. They put theobligor, and not the obligee, at an advantage. They do not necessarily consist of a sum limitation. When they do, they set a ceiling, which is often onlya maximum, below which, generally, the actual amount of the damages willstill have to be determined, while liquidated damages stipulate a lump sum.

Yet, both techniques are at times closely related. Frequently a liquidated damages clause is inspired, not by the obligee, but by the obligorhimself-anxious to have the amount of the damages assessed moderately.Such a provision is then very similar to a clause limiting liability, eventhough the ceiling is replaced here by a lump sum. This phenomenon hasalready been described in the chapter on liquidated damages clauses. lO

2. Force Majeure Clauses

Force majeure clauses are also analyzed in a later chapter.11 They providethat in cases where performance is precluded by the occurrence of eventsoutside the obligor's control, and which the obligor could neither foreseenor overcome, the obligor shall be exempted.

8 Cf. SLlfJTa, Chapter 6.

9 This may raise questions of validity, which have been examined supra, pp. 338-340.

10 Cf. supra, Chapter 6, pp. 338-340.



Whereas exemption or limitation clauses deal with the consequencesof breach of contract, force majeure clauses deal with cases of non-performance that are not the result of any fault on the obligor's part.

Still, they have common points. First, most legal systems acknowledgecases of faultless liability, in which the obligor is liable even in cases of nonperformance resulting from subsequent impossibility (this is the principleaccepted in common law). A force majeure clause then amounts to anexemption or limitation clause, since it precludes or limits liability in certain situations where the obligor could otherwise be liable.

Secondly, where the applicable law exempts the obligor from liabilitywhen non-performance is due to a cause outside his control, there are conditions to be met. A force majeur-e clause, which softens such conditions (bynot requesting, for instance, the obligor to prove the unforeseeability ofthe force majeure event), extends the scope of the exemption to cases wherethe obligor would normally be held liable, thus becoming a variety ofexemption or limitation clause. 12

3. Hold-Harmless Agreements

It is not always possible for the obligor to insert a term into the contract exempting himself of all or part of his liability; such exemption is stillmore difficult to negotiate when it concerns tort liability, which most oftenarises out of relations with third parties.

To achieve a similar result, the obligor sometimes resorts to anothertechnique, which consists of transferring to the other party the burden ofthe liability that the obligor would otherwise bear towards a third party. Letus suppose A has a contract with B, which A intends to perform with C'scooperation. In case of defective performance, A would be contractuallyliable towards B. If A is not able to limit such liability in his contract withB, he can try and obtain C's promise that C will hold A harmless of anyclaim B (or yet another party) would have against A. Such clauses are oftencalled "hold-harmless agreements," or "contractual indemnity clauses."13

Here are a few examples of such clauses:

• "The Consultant shall indemnify and hold harmless the Companyfrom and against any and all claims, damages, expenses and costs,

12 Cf. i'fljfa, p. 424; several examples of this situation will be provided infra, pp. 364-367.

13 Cf. National Underwriter Company, Georgia Chapter, The Hold Harmless Agreement,Cincinnati, Ohio, 1977; J. Adams & R. Brownsword, Contractual Indemnity Clauses,Iourn. ofBus. Law, May 1982, pp. 200-209; Y Aubin & T. Portwood, Les clauses reciproques d'abandon de recours et de garanties contre les recours de tiers, I.B.LJ, 2001, pp.671-698.


including those asserted by third parties, arising out of its serviceshereunder, except in respect of defective or erroneous work or asotherwise provided hereunder."

• "Le Fournisseur garantit Ie Constructeur contre toutes consequences, directes ou indirectes, de la responsabilite pouvant luiincomber personnellement, notamment celles decoulant du nonrespect des regles en vigueur dans Ie pays de destination duvehicule et/ou de ses obligations stipulees par Ie ou les contratspasses avec Ie Constructeur, en raison des dommages corporels,materiels ou immateriels causes aux tiers, au Constructeur et asesayants cause. A cette fin, Ie Fournisseur devra s'assurer en consequence.

• "Le Fournisseur garantit Ie Constructeur contre toute revendication ou reclamation de tiers relative ason Produit, fondee sur unecontrefa<;,:on ou une atteinte ades droits de Propriete Industrielle."

• "The Employer shall indemnity and hold harmless the Contractor,the Contractor's Personnel, and their respective agents, againstand from all claims, damages, losses and expenses (including legalfees and expenses) in respect of (1) bodily injury, sickness, diseaseor death, which is attributable to any negligence, wilful act orbreach of the Contract by the Employer, the Employer's Personnel,or any of their respective agents, and (2) the matters for which liability may be excluded from insurance cover, as described in subparagraphs (d) (i), (ii) and (iii) of Sub-Clause 18.3 [InsuranceAgainst Injury to Persons and Damage to Property] ."14

• "Le Licencie devra indemniser, defendre et garantir Ie Concedantde toute action engagee par des tiers pour des dommages auxbiens, des dommages corporels, et les pertes qui en resultent,causes directement ou indirectement par les Produits Licencies."15

Hold-harmless agreements are not exemption or limitation clauses,since they do not affect liability towards the aggrieved obligee. Their technique consists in shifting the burden on such liability to someone else. Theeffect is similar to that of liability insurance. I6

II. PRACTICE

The following analysis is an attempt at describing and classifyingthe different possible components of exemption and limitation clauses,

14 FIDIC, ConditionsofContTactfoTConstTUction, 1sted., 1999,Art.17.1 al. 2.

15 ORGALIME, Model ContractfoT International Transfer of Technology, EUjEEA version,June 1997, Art. 10.3.

16 Other examples of hold-harmless agreeTnents, in contracts concerning the exploitation of space, are to be found in P. Thys & MJ. Golub, op. cit., pp. 526 et seq.; L. Ravillon,I"es telecornrnunications paT satellites, Aspects juridiques, Paris, 1997, pp. 227-228.


with the many variations-some good, some less commendablefound in practice .17

A. Exemption Clauses

Exemption clauses are not as frequent as limiting clauses. They are notso easily accepted at the negotiation stage of the contract, and subsequentlytheir validity maybe contested, at least when they bear on the non-performance of essential obligations.I8

In the first example, a licensor waives all obligation of warranty in casethird parties should sue the licensee:

"RPT shall not be liable to Licensee because of any claim of infringement by Licensee of any third party's patent or patent application byreason of the use of licence herein granted to Licensee."

In the second example, a tax consultant will not accept liability for hislack of knowledge of foreign law, except in specific circumstances:

"Toute responsabilite du conseiller fiscal du chef de violation oud'inobservation d'un droit etranger est exclue, sauf si Ie conseillerfiscal est tenu par un mandat en execution duquella connaissancedu droit etranger est requise de lui."

An environmental audit is organized in connection with a transfer ofshares. The agreement provides that the buyer may request "correctiveactions" depending of the results of the audit. The seller exempts himselfof all liability in the following case:

''Y shall not be liable for any corrective action required by thirdparties or for any fines or damages resulting from a situation orprocedure which was identified as problematic in the conclusionsof the environmental audit, and for which no corrective action hasbeen required by Y"

17 For other surveys of such clauses in practice, cf.J. Livermore, Exemption Clausesin Inter-Business Contracts, ]ourn. of Has. Law, 1986, pp. 90-102; R.H. Wol1jer, Limitations of Liability in Commercial Contracts, in Slnu;luring Inlernalional Conlnu;ls, D.Campbell (eel.) , Kluwer, 1996, pp. 219-229; H. Dubout, Les clauses de non-garantie dansles cessions de droits sociaux en droit fran<;:ais, Bull. Joly, December 1995, pp. 1039-1045;J.M. Mousseron, Technique contractuelle, Paris, Ed. F. Lefebvre, 2nd ed., 1999, No.1403-1431; J. Rajski, Limitation of Liability and Exclusion Clauses in InternationalContracts, I.B.LJ, 2002, pp. 321-328.

IS Cf. infra, pp. 382-391.


A frequent situation occurs when the organizer of a show or eventexempts himself from liability in case of failure to comply with safety obligations for which he might be held liable:

"Le porteur du present ticket renonce, en cas d'accident, a toutrecours envers Ie comite du Salon."

In another case, the manager of a car park exempts himself in case oftheft or damage caused to the cars:

"Le parking decline toute responsabilite concernant les degats etIe vol aussi bien des voitures que des objets y contenus.

"Nous nous bornons avous louer un emplacement et nous n'assumons aucune responsabilite de depositaire."

It appears that the exemption of liability is reinforced by a mentionaimed at denying the very existence of the obligation that could cause liability (here the obligation of safekeeping that would derive from a contractof deposit). A similar technique is used in the two following examples, theformer concerning the supply of technical assistance and services, the latter the stipulation of delivery dates: in both cases, the "obligation" is stated,but its imperative character is denied.

• "The technical assistance and the services which A undertakes toperform for B in accordance with this Agreement will be of anadvisory nature only, and due to this all of the responsibility for theutilization of the technical recommendations provided by A, itsemployees, its affiliates or their employees in accordance with thisAgreement, shall rest solely with B."

• "Les delais de livraison sont donnes seulement a titre indicatif etsont fonction des possibilites d'approvisionnement. Ils sont respectes dans la limite du possible. Les retards ne peuvent en aucun casjustifier l'annulation de la commande ni une demande de dommages-interets."Aucune penalite ne pourra etre appliquee en cas de retard,Ineme en cas de Inise en demeure."

A chemical firm supplies an engineering company with patents used bythe latter to implement specific programs. The custom has been established to increase the price by a "risk margin" aimed at covering possibleomissions in the listing of the necessary products. One of the contractsdoes not include the "risk margin": consequently, the chemical firmexempts itself from the consequences of possible omissions by means of thefollowing exemption clause, the drafting of which could have been moreprecise:


"Etant donne qu'il n'y a pas eu de "marge d'aleas" prevue par B ala disposition de A, B prendra asa charge les aleas qui pourraientintervenir (oubli de nomenclature, par exemple)."

The next clause has been discussed extensively by the group:

"B shall bear all liabilities, in contract, in torts (including negligence) or otherwise, for any damage whatsoever, to person orproperty, sustained during the period of time from the delivery ofthe prototype by A until restitution of the latter to A pursuant toarticle 6.

"Accordingly A shall bear no liability whatsoever for any kind ofdamage, given the fact that the prototypes are delivered 'as such,'that no warranty whatsoever is granted by A with regard to the performance, quality or design of such prototypes and finally that Balone is responsable for installing the prototypes on its facilitiesand for the testing work to be performed therewith."

The clause appeared in a contract of technical assistance concerningthe implementation of a new product. The prototype manufactured by Ais delivered to B so that B might test it. A wishes to exempt itself from anyliability in case of damage caused by the prototype.

The clause may be effective if B himself is the victim. But what happensif the victim is a third party? If the third party brings an action against B,the clause will preclude any action by B against A. But if the victim bringsan action against A (which is lawful as the third party is not a party to thecontract), will the clause entitle A to transfer the liability onto B? Does itwork then as a hold-harmless undertaking of B towards A? This is unclear,due to imprecise drafting.

B. Limitation Clauses

Limitation clauses may be classified into two categories depending onwhether they affect the conditions or the effects of liability or warranty.

1. Limitation of the Conditions

The purpose is to restrict the conditions under which liability mayoccur. Several techniques are available: limiting the scope of obligations,restricting liability to cases of fraud or gross negligence, extending the casesof exemption, shifting the burden of proof, shortening time limits for acting, subjecting claims to particular requirements.


a. Limitation of the Scope of the Obligations

Exemption clauses often use the technique of denying the very existence or the imperative character of the obligation.19 The same techniqueis used in clauses limiting liability. The clause deals directly with the possible cause of liability, i.e., the obligation, to restrict its scope or intensity ascompared to what they would normally be under the law.

Very often, professionals define the scope of their obligations by reference to standards such as "general trade standards" or "practices." Suchstandards have been examined in a preceding chapter. 2o Here are a fewexamples:

• "Le bureau d'etudes s'engage a executer les etudes qui lui sontconfiees au mieux de son experience et selon les regles de l'art deI'ingenieur."

• "The Consultant will provide all the expert advice and skills whichare normally required for the class of services for which he isengaged."

• "A exercera les missions aelle confiees selon les usages en vigueurdans la profession miniere internationale. Toute decision qui pourrait intervenir a l'encontre de ce principe n'engagerait pas laresponsabilite de A."

• "A will exercise due diligence in the fulfillment of its obligations inaccordance with this Agreement and its performance will be inaccord with the regular practices in the petroleum industry."

• "A undertakes to perform its obligations under this Agreement ina prudent and sound manner and to apply the same degree of diligence it would apply it were the sole owner of the Property and theFacilities to be developed in connection therewith, and to be mindful of the interest of B and to use the best copper industry practiceknown to A which is applicable to this Agreement and the Project."

The party who refers to the rules or usages of its trade often feels safe:it will not require anything beyond normal practice in the trade. One must,of course, assume that the concerned party will effectively comply with suchrules or usages, while being aware of possible difficulties related to establishing their existence and their contents.

Are such provisions really equivalent to clauses limiting liability? It alldepends on the standards defined by such rules or customs, as comparedwith the general principles of the law. The liability will be reduced if the

19 Cf. supra, pp. 358-360.

20 Cf. supra, Chapter 4.


relevant usages are somewhat tolerant as to the quality of the requiredperformance. But it has been shown that more often, the rules of thetrade will place greater constraints on the performance required from aprofessional party.21

To define the scope or the intensity of an obligation thus amounts to aclause limiting liability only when it softens the principles applicable in theabsence of such a clause.

This happens in a clause limiting the obligation of warranty of a supplier to the working specifications expressly listed in the contract, exclusiveof any warranty of fitness of the product to the needs of the buyer:

"Le fournisseur garantit que Ie Produit est conforme aux specifications fonctionnelles figurant en Annexe 1; cette garantie nesaurait en aucun cas etre consideree comme une garantie de resultat, portant sur l'adequation du Produit aux besoins du Preneur."

Another way to limit liability consists of a stipulation transforming an"obligation to reach a specific result" into a mere "obligation of due diligence." For example, a carrier would only undertake to "exert all due diligence" to deliver the goods. An engineer would only undertake to use "hisbest efforts" when a specific result would normally be expected from him. 22

Another technique to limit the scope of one's obligations is to specifythe conditions under which the agreement will be binding. Such is thetechnique used by a tax consultant in the following clause:

"En ce qui concerne les explications et les renseignements donnes oralement par Ie conseiller fiscal ou son collaborateur, leurresponsabilite ne peut etre engagee que lorsqu'ils ont ete confirmes par ecrit."

The above examples concern limitations of a legal nature. But liabilityor warranty may also be limited by specifications of a technical nature, suchas a narrow definition of the expected performance of a machine.

b. Liability Limited to Cases of Fraud or Gross Negligence

Most legal systems will not enforce exemption clauses and clauses limiting liability when the breach is the result of fraud or gross negligence onthe part of the obligor. 23


22 On the distinction between "obligations of best efforts" and "obligations to reacha specific result," d. SU!JrCl, Chapter 4, pp. 218-222.

23 Cf. infra, pp. 384-385.


Some exemption clauses anticipate this situation and state they do notapply to cases of fraud or gross negligence. Liability is thus limited to suchinstances, while the exemption concerns other types of breaches.

Here are two examples, both concerning services contracts:

• "A et ses agents ne seront pas responsables vis-a.-vis de B de pertes,dommages, obligations ou depenses encourues ou subies par Bdirectement ou indirectement en consequence de fournituresde services aux termes du present contrat, a. l'exception detoutes pertes, dommages, obligations ou depenses resultantdirectement ou indirectement de la mauvaise foi, de negligencevolontaires ou grossieres constituant une faute lourde professionnelle de A et ses agents."

• "Neither A, its employees, nor any affiliated company of A or itsemployees, will be responsible for losses or damages that may beincurred by B or any third party by reason of any action or omission by B, its employees or any third party even though said actionor omission was based on technical information or advice furnished by A, its employees, any of its affiliated companies or itsemployees, in accordance with this Agreement, except if such damages or losses were caused by fraud, bad faith or gross negligenceon the part of A or its employees."

In the following example taken from a share transfer agreement, grossnegligence is not excluded from the scope of the limitation clause, but onlywillful misconduct:

"Exclusive Remedy-The indemnification provisions contained inthis Article 10 shall constitute the exclusive remedy of the Partiesin connection with this Agreement and the transactions contemplated hereby other than claims arising out of willful misconductor fraud of a Party."

In other cases, the liability resulting from minor faults is retained withsum limits, and it is these limits that disappear in case of gross negligence:

"Notwithstanding the above, the limit of cumulative liability underparagraph B shall not apply to CONTRACTOR's liabilities arisingfrom gross negligence and willful acts of CONTRACTOR forwhich CONTRACTOR's liability under CONTRACT shall beunlimited."


C. Extension of the Cases of Exemption

Possible relationships between force majeure clauses and clauses limitingliability have already been considered. 24 A fora majeure clause results in alimitation of liability when it broadens the scope of the exemption, in comparison with the solutions normally provided by the law.

Here are a few examples:25

Sometimes the obligor is not requested to prove the unforeseeablecharacter of the force majeure event:

• "In the Contract 'force majeure' shall mean any occurence outsidethe control of the parties preventing or delaying their performance of the contract. ..."

• "En cas de survenance d'evenements independants de la volontedes parties et d'impossibilite d'execution totale ou partielle parune des parties engagees par la presente convention...."

In other instances, the obligor is not requested to prove that the foramajeure event was unavoidable:

"The contracting parties are relieved of their obligations for partial or complete failure to comply with the contract liabilities withregard to the delivery terms if such failure is due to force majeure.Force majeure regards all circumstances occured after the signature of the contract and as a result of any event of exceptionalnature, that could not have been anticipated by the contractingparties at the signature of the contract. ..."

In still other cases, the terms of the contract bear no mention of theconsequences of fora majeur/! on the performance of the contract:

"On entend par force majeure pour l'execution du contrat tous lesevenements independants de la volonte des parties, imprevisiblesou, si previsibles, inevitables."

Such omissions may be involuntary; but some may reflect a desire tosoften the strictness of the classical requirements of fora majeure. Such adesire is more obvious in clauses that qualify the usual criteria to softentheir rigidity.

The concept of unavoidability, for instance, is softened in the following clause:

21 Cf. SU!JTCl, pp. 355-356.

25 These examples will be considered again infra; pp. 403-406.


"On entend par force majeure pour l'execution du contrat toutacte ou evenement imprevisible, irresistible, hors du controle desparties et qui ne pourra etre empeche par ces dernieres malgredes efforts raisonnablement possibles."

The concept of reasonableness can also help to soften the rigidity ofthe unforeseeable character of the force majeure event:

"... tout evenement, circonstance ou etat de fait que Ie vendeurne pouvait raisonnablement ni prevoir, ni empecher et auquel illui a ete impossible de porter remede de maniere a pouvoirrespecter les delais contractuels de livraison."

Most of the time, however, the softening of requirements affects theimpact of the force majeure event upon the contractual obligations. Absoluteimpossibility of performance is not always required:

• "On entend par force majeure . . . tout acte ou evenementimprevisible, irresistible et independant de la volonte des partiesrendant momentanement humainement impossible l'execution deleurs obligations ou de certaines d'entre elles."

• "Sont consideres comme cas de force majeure ou assimiles, outreles cas communement admis par la jurisprudence beIge etfran<;aise ...(list of events)

• "... et en general, toutes les causes etrangeres ala volonte ou al'influence des contractants qui pourraient mettre obstacle a lamarche normale de l'approvisionnement, de la fabrication ou desexpeditions des contractants."

• "If either party is prevented or delayed in carrying out any of theprovisions of this Agreement by reasons of ...(list of events)

• or any event beyond its control making it impossible or exorbitantfrom an industriel or commercial standpoint to perform its obligations hereunder...."

In the last example given, the usual concept of force majeure is modifiedin two ways: the clause softens the requirement of "impossibility of performance," and it does not mention the criterion of "unforeseeableness."

The effect of such clauses is to exempt the obligor in cases where thelaw would normally hold him liable.

Close to these are the clauses that establish lists of cases in which a warranty does not apply and add to the number of exemptions defined, by the


law (buyer's fault, subsequent impossibility, etc.), certain other circumstances where the warranty would normally apply. The following exampleshows how the warranty may be further limited by excluding damages dueto accidents as well as breakdowns resulting from the use of appliances notin conformity with the norms:

"La garantie ne comprend pas la reparation des pannes dont lacause n'est pas imputable au fabricant et notamment:

"la reparation des degats resultant d'une fausse manceuvre caracterisee du personnel du client, d'un accident, d'une negligence,d'une utilisation anormale, de la malveillance ou d'actes de sabotage, fait de greve, d'emeutes ou de guerre, ni de la reparation detous les degats provoques par l'eau, les chutes et chocs brutaux,l'effondrement des locaux, et d'une fa<;on generale, tous accidentsou sinistres susceptibles de deteriorer l'equipement;

"la reparation de toute panne prenant son origine dans une installation electrique ou telegraphique defectueuse du client, dans laqualite du courant fourni ou dans des conditions d'installationnon conformes aux specifications indiquees par Ie FABRICANT;

"la reparation de toute panne due al'utilisation de fournitures nerepondant pas aux normes agreees par Ie FABRICANT;

"la reparation de toute panne due ades materiels ou dispositifsnon fournis par Ie FABRICANT et raccordes a l'equipement sansautorisation ecrite prealable du FABRICANT."

d. Transfer of the Burden of Proof

Allocation of the burden of proof plays an important part in a liabilitysystem. For instance, must the obligee prove that the fault of the obligor,or shall the fault be simply assumed in case of non-performance, in whichcase the obligor would have to prove that the supervening cause was outside his control to be exempted?

The applicable law establishes the relevant principles. Under Frenchlaw, for instance, the distinction between "obligations of due diligence" and"obligations to achieve a specific result" coincides with different allocationsof the burden of proof. 26

When the law lays the burden of proof on him, the obligor may restricthis liability by transferring that burden onto the other party. This isachieved, for instance, by clauses that turn an "obligation to achieve a spe-

26 Cf. F. Terre, Ph. Simler & Y Lequette, Les Obligations, 6th ed., No. 552-566; d. alsosupra, Chapter 4, pp. 218-222.


cific result" into an "obligation of due diligence." Another example is givenin this clause appearing in a fire insurance contract, through which theinsurer rids himself of the burden to prove the exemption case justifyingdenial of coverage:

"Les dispositions ci-dessus du 7° ne constituent qu'une enumeration d'exclusions mais ne concernent pas la charge de la preuve.En ce qui concerne celle-ci, il est convenu qu'elle incombe exclusivement a l'assure qui doit etablir que les dommages ne se rattachent ni directement ni indirectement aux cas prevus parl'enumeration. L'indemnite n'est due que si cette preuve est faite."

e. Limitations of Time Periods to Take Action

Liability and warranty are also limited in time. The statute on limitation in itself constitutes a legal limit to liability: after a certain period oftime the obligor can no longer be sued by the obligee. In French law, thebuyer can invoke the warranty concerning latent defects only within "ashort term" (Article 1648 of the Civil Code).

Inasmuch as such time limits may be validly abridged, the obligorenjoys another means of limiting his liability (or warranty).

This technique is often used to limit the warranties offered by the seller:

• "The warranty contained in Conditions 12.2 shall apply in respectof matters whereof the Customer gives written notice within (12)months of performance of the Services given rise to the Customer's claim after which any claim in respect thereof or in respectof any parts supplied shall be absolutely barred."

• "1. The Contractor shall warrant each Unit for a period of one (1)year from the date of first synchronization against defects indesign, materials and workmanship."2. However, such warranty period shall in any case expire fifteen(15) months from the date of readiness for shipment ex works ofthe generator in case shipment, transportation, erection, commissioning, field test or first synchronization are delayed, unless thereason for such delay is attributable to the Contractor, in which casethe warranty period shall be extended by the amount of such delay."

• "La garantie du tube est limitee asix mois ou 1.000 (mille) heuresde fonctionnement."

This technique can also assume other forms, as in the three followingclauses, respectively taken from an insurance contract, a contract betweena solicitor and his client and a contract for software licencing:


• "Toute action en paiement des dommages est prescrite apres undeIai de six mois acompter du jour du sinistre ou des dernierespoursuites judiciaires. Ce deIai expire, la Compagnie est dechargeeaussi bien envers l'assure qu'envers tous opposants, cessionnairesou beneficiaires."

• "Les creances de l'avocat contre son mandant se prescrivent pardeux ans ... Ce delai court adater de la fin de l'annee pendantlaquelle Ie mandat a pris fin. Ce deIai ne s'applique pas si la prescription prevue par la loi est plus courte. La creance du mandantdu chef de dommages et intef(~~ts, resultant du contrat existantentre l'avocat et lui, se prescrit par 3 ans, adater de la naissancede la creance et, au plus tard, adater de la fin du mandat."

• "The Lead X Company warrants that any particular copy of a XSoftware Product will perform substantially in accordance with theapplicable user documentation published by X for a period ofninety (90) days from the date an Enrolling Customer ordered, orwas required by Section 5 above to order, a License for such copy."

f. Subjection of the Claim to Special Requirements

A subtle means of limiting one's liability is to impose certain formalrequirements, or the payment of certain costs, in order to put obstacles inthe way of the dissatisfied obligee intending to exercise a claim. Here areexamples of such a technique:

• "Any claim made under the guarantee should be submitted to uswithout delay in writing, enclosing all grounds for the complaint.Handing will then occur in accordance with the procedure determined by us. Goods for which a claim under guarantee has beenmade, should be sent carriage paid to us, only following our specific request for their return."

• "L'acheteur ou Ie client est tenu de denoncer par ecrit les vices dela marchandise livree dans un delai de 14jours acompter de l'arrivee de celle-ci au lieu de destination...."

• "To qualifY for indemnity of the damages covered by this Guarantee,the following terms and conditions have to be fulfilled:"a) the storage of the roofing membrane has been done asinstructed in the Products Information Sheet issued by ... ;"b) the total amount of the invoice of ... has been settled;"c) the registration form has been submitted to ... at least fourteen days before the beginning of the works;"d) every departure from the installation instructions is previouslyreported in writing to and approved by ... ;"e) after issuing the certificate of Guarantee neither the contractor nor a third party is allowed to carry out any repair work with-


out the prior written consent of ... , save as of the repair mentioned in following paragraph;"f) the owner of the object is obliged to make regular inspectionson the roof and make all necessary arrangements in case of damage, in order to protect the property from further damage."

2. Limitation of the Consequences

The clauses examined here do not affect the conditions under whichliability or warranty could be engaged, but they limit the consequences ofsuch liability or warranty. When it is found that the obligor must pay damages, what is the extent of this obligation? Depending on the answer provided by the law, various clauses may limit the extent of the obligor'sobligations.

a. Limitation of the Amount Payable

Liability is, most of the time, unlimited: the totality of the damagesmust be compensated.27 The obligor thereby runs the risk of being ruined,especially when the potential prejudice is out of proportion with the profitit will derive from the contract. In consequence, one of the most populartechniques to limit liability consists of establishing a ceiling above whichthe obligor will not be held liable. 28

Such ceilings are sometimes expressed in absolute figures:

• "The total liability of X and/or the Principals in connection withthe Agreement whether in contract or in negligence or otherwisehowsoever (including but not limited to the liabilities of X underArticles 1.3 and 1.4 of the Agreement) shall not exceed the sum of150,000 pounds sterling in aggregate."

• "The total liability of Company Y for all claims in respect of theWarranties shall not exceed ... EURO."

Yet, quite often, the maxima are calculated with a more objective measure of the interest the obligor has in performing the contract.

27 However, the different legal systems have restrictions as to the extent to whichindirect or unforeseeable damage have to be indemnified (d. infra, pp. 373-378).

28 It will be recalled that certain liquidated damages clauses may have the functionto limit liability (d. SU!JrCl, pp. 338-340). Legislation can also provide limitations of theamount of liability (d. supra, p. 351, note 2).


The contractual price is often used as a basis to calculate the damages:

• "The total liability of the Contractor to the Employer, under or inconnection with the Contract other than ... shall not exceed thesum stated in the Particular Conditions or (if a sum is not sostated) the Accepted Contract Amount."29

• "A shall pay ... liquidated damages at the rate of one per cent (1%) of the contractual price per week of delay...."

• "... En l'absence d'accord different, les dommages-interets deretard ne depasseront pas 2 % par semaine de retard sans pouvoirdepasser 20 % de la redevance minimum des la premiere anneetelle qu'elle est etablie a la clause 19."30

• "X shall be held liable for direct proven damages arising fromproven mistakes by ... concerning the supply of written technicaldata and information furnished to Licensee for a specific projectunder this Agreement up to a maximum amount of twenty-fivepercent (25%) of the Royalties to be paid by Licensee for the saidproject."

• "Dans Ie cas OU C n'assumerait pas ses obligations contractuellesdefinies a l'Annexe 1 cijointe, Ie seul recours du Client sera Iedroit de recouvrer un montant equitable qui n'excedera cependant pas les montants payes aC et relatifs ade tels Services."

• "The liability of M for negligence shall not, in any event, exceedthe amount paid by Representative to M hereunder during the six(6) months period preceding the month in which the loss isalleged to have occurred."

• "Seller's total liability to Buyer for all claims of any kind, whetherbased upon contract, tort (regardless of the degree of fault or negligence) or otherwise for any loss or damage arising out of, connected with, or resulting from the performance or breach of theseConditions of Sale or any Purchase Order hereunder shall in nocase exceed the amount of the price of the specific Product or service which gives rise to the claim."

The same technique is also used in contracts with consulting engineers,who usually limit their liability to the amount of their fees:

• "En tout etat de cause, la responsabilite du bureau d'etudes pourun dommage survenu restera dans un rapport equitable avec Iemontant des honoraires pen;,:us, sans jamais depasser Ie montantde ces honoraires."

29 FIDIC, Condilions q! Conlnu;l.for Conslrur:lion, 1st ed., 1999, Art. 17.6.

30 Orgalime, Model Contract for International Transfer of Technolob,ry, ED/EEA version,June 1997, Art. 10.2.


• "La responsabilite de la societe d'etudes sera, en tous les cas, limitee, d'une part a la reparation des dommages directs causes et,d'autre part, au montant des honoraires convenus pour l'ouvrageen cause ou, dans Ie cas 011 il aurait ete stipule des honoraires fractionnes pour chaque mission, au montant des honoraires stipulespour la mission au cours de laquelle la faute aurait ete commise."31

In the following example, the client has obtained that such limitationof liability linked to the remuneration be limited to contractual liability,and that is applied reciprocally:

"1. Without prejudice to Articles ... , Company's contractualliability shall be limited in amount to fifteen per cent (15%) of theContract Price.

"2. Without prejudice to Article 23.4 concerning re-performing ofCorrective Services and to Article 35.2, Engineer's contractualliability shall be limited in amount to fifteen per cent (15%) of theContract Price."

A more sophisticated clause sets limitations only over and above certain of the contractor's obligations, and the sums he may himself recoverfrom vendors, sub-contractors and insurers:

"B) CONTRACTOR'S liabilities to OWNER with regard to

"a) breach or default by CONTRACTOR in fulfilling warrantiesand guarantees pursuant to paragraphs 1 and B of ARTICLE 17WARRANTIES AND GUARANTEES.

"b) Claims, damages and costs awarded against OWNER for patentinfringement pursuant to paragraph A-3 of ARTICLE 18PATENTS AND TECHNICAL INFORMATION.

"c) Indemnification for claims of third parties against OWNERpursuant to paragraph D of ARTICLE 19-CONTRACTORS'SRESPONSIBILIlY

shall be limited to a cumulative maximum amount of nine hundred million Italian Lire (Lit 900,00,000).

"C) The limit of cumulative liability under paragraph B shall beover and above CONTRACTOR's own services to be performed

31 On the limitation of liability of consulting engineers, d. A. Hubert, Le contratd'ingenierie-conseil, 2nd eel., 1984, pp. 82-86.


pursuant to above paragraph B-a plus any indemnification recovered from vendors, subcontractors (contracted in name and onbehalf of ... and insurances carried by CONTRACTOR pursuantto the CONTRACT."

The seller remains thus obliged to provide his warranty, and it musttransfer to the buyer all indemnities that he might himself receive fromthird parties. It is only over and above these sums that the limitation of liability shall apply.

An original system is that of a "scaled limitation." If buyers of shareshave to cope with claims from third parties (in this case, claims caused bydamages to the environment resulting from a situation that existed beforethe transfer and had not been disclosed), the seller's liability is limited inthe first stage but it gradually increases with the passage of time:

"... the Seller shall assume part of the obligation to reimburse theBuyer ... in accordance with the following scheme:"for expenses in the course of 1991: 20 %;"for expenses in the course of 1992: 40 %;"for expenses in the course of 1993: 60 %;"for expenses in the course of 1994: 80 %;"for expenses in the course of 1995 and following years: 100 %."

b. Liability Deductible

Limitation of liability can take on the form of a treshold rather than aceiling:

"Seller shall not be liable for any claim under any of the Warrantiesuntil the aggregate amount of the liability in respect of all suchclaims exceeds ... EURO in the case of COMPANY X acting as aSeller and ... EURO in the case of COMPANYYacting as a Seller(in which event Buyer shall be entitled to claim the whole amountof such claim and not just the excess)."

The last provision in parentheses brings useful clarification, which willavoid the problem of interpretation that frequently appears with deductibles.

The following clause provides for a double deductible:

"The warranties shall not be triggered unless the double conditionthat the cumulative amount having given rise to the claim isgreater than R$ ... , and that the amount of each of the losses giving rise to a claim is equal to a minimum of R$...."


Deductible and maximum can be combined:

"17.4. Neither ... nor any other company of the ... Group shallhave any obligation to indemnifY ... or any other company of the... Group for matters related to the Business beyond a totalamount of DEM ... in the aggregate for all claims made for suchmatters, provided that the DEM ... aggregate referred to underSection 3 shall not be exceeded thereby.

"Companies within ... Group shall not be entitled to indemnification unless the aggregate total amount of their claims amountsto at least DEM ... In case the aggregate amount of the damagessuffered by companies within ... Group exceeds such amount,companies within ... Group shall be indemnified for the fullamount of the damages suffered by them up to the maximumamount of DEM ... to the extent as provided hereabove."

c. Exemption of Joint Liability

When an obligor is liable jointly and severally, he is liable for the wholedamages. Where joint liability is applicable (as a consequence, for instance,of a statutory provision), any contractual statement, which sets it aside, issimilar to a clause limiting liability.

Here is an example taken from a co-insurance contract:.

"L'assurance est souserite par chacun des coassureurs pour ses partet portion et sans solidarite, aux memes clauses et conditions quecelles d'application entre la Compagnie et l'assure."

d. Exclusion of Consequential Damages

Beyond damages resulting directly from the non-performance of a contractualobligation (for instance, defects in the supplied product or in thebuilding), default on the obligor's part often causes consequential damagesto the obligee. The poor quality of a machine may result in an interruptionof the assembly line. One of the tires of a plane explodes when landing,provoking the loss of the plane and the death of many passengers.

Such damages may be very serious, in comparison to both the directdamages and the interest the obligor derives from the contract. Most of thetime they are very difficult to foresee. 32

32 Unforeseeable damages will be examined more specifically infra, pp. 377-378.


Liability for indirect damages is a classical-and difficult-issue in alllegal systems. 33 In view of the possible lack of certainty of the remediesgranted by the law, many clauses limiting liability exempt the obligor fromany liability for consequential damages.

Such exclusion may take various forms. It is implicit when liability isexpressly limited to the payment of direct damages:

• "Le bureau d'etudes assume l'entiere responsabilite des dommagesdirects resultant d' erreurs ou omissions dont seraient entaches lesetudes, calculs, plans et autres documents fournis par lui en execution du present contrat."

• "In providing the Services, the Consultant's sole liability in respectof defective or erroneous work shall be to correct or refurnishwithout cost to the Company any particular item of Services rendered hereunder which proves defective or erroneous and is sonotified to the Consultant by the Company from the Effective Dateup to the period ending twelve months after submission of theFinal Report."

• "En cas d'echec du Constructeur dans les operations de ReceptionDefinitive prevues a l'Article 18.4 ci-dessus, ou a fortiori si IeConstructeur n'etait pas en mesure de proceder aux operations deReception Definitive conformement aux dispositions de l'Article14.4 ci-dessus, Ie Constructeur indemnisera EMIR du Prejudicedirect subi par elle du fait du non-accomplissement par Ie Constnlcteur de la totalite des obligations lui incombant aux termes dela presente convention.

• "A cet effet, il est expressement convenu que la reparation duprejudice direct subi par EMIR comprendra...." [This is followedby an enumeration of categories of damages considered as directdamages.]

In this clause bearing reference to Article 1150 of the French CivilCode, the exclusion of consequential damages is clear but discrete:

"Les penalites prevues au present article constituent les seuls dommages-interE~tssusceptibles d'etre reclames par Ie client conformement aux dispositions des articles 1150 et suivants du Code civil."

Most of the time, the exemption is explicit, but its expression may takedifferent forms:

• "En tout etat de cause, Ie prejudice indirect n'est pas couvert parIe bureau d'etudes techniques."

33 Cf.in/fa, pp. 391-394.


• "In no event shall either party be liable for special, indirect or consequential damages."

• "The Contractor's liability under the Article 32 shall be exclusiveand in lieu of any conditions or warranty implied by law (includingIMPLIED WARRANTIES OF FITNESS FOR PURPOSE AND MERCHANTABILI1Y) and save as in said Articles expressed neither theContractor nor his Sub-Contractors, servants or agents shall beliable, whether in contract, tort or otherwise in respect of defects inor damages to such part, or for any injury, damage or loss of whatsoever kind attributable to such defects or damage. All such liabilityshall terminate upon expiration of the warranty period."

• "La responsabilite des parties ne couvrira en aucun cas des dommages speciaux, immateriels, incidents ou indirects."

Other clauses again exclude liability for consequential damages, butthe exemption does not apply to cases of fraud or gross negligence.

• "Toutes les autres revendications de l'acheteur, en particulier larevendication de dommages et inten~~ts du fait du dommage indirect, sont a exclure si elles sont fondees sur une violation contractuelle positive.34 Cette limitation ne s'applique pas si laviolation du contrat resulte d'une negligence grave ou d'une fauteintentionnelle."

• "Neither Party shall be liable to the other Party for loss of use ofany Works, loss of profit, loss of any contract or for any indirect orconsequential loss or damage which may be suffered by the otherParty in connection with the Contract, other than under SubClause 16.4 ... and Sub-Clause 17.1 ..."... This Sub-Clause shall not limit liability in any case of fraud,deliberate default or reckless misconduct by the defaulting Party. "3:)

• "Mter taking over and save as in this Clause expressed, the Contractor shall be under no liability even in respect of defects due tocauses existing before taking over. It is expreSSly agreed that thePurchaser shall have no claim in respect of personal injury or ofdamage to property not the subject-matter of the Contract arisingafter taking over nor for loss of profit unless it is shown from thecircumstances of the case that Contractor has been guilty of grossmisconduct. "36

34 On the notion of "positive contractual breach" in German law (before the reformof2002), d. Palandt, 0fl. cil., pp. 346-350.

35 FIDIC, ConditionsofContTactfoTConstTUction, Isted., 1999, Art. 17.6.

36 U.N. Economic Commission for Europe, Conditions No. ] ]8a, Art. 23.14.


The above-mentioned clauses only refer to consequential damages inan abstract manner. This concept being likely to give rise to problems ofinterpretation, the parties think it fit, in many cases, to establish a list of thevarious types of indirect damages covered by the exemption. Among these,one shall notice loss of profit, cost of replacement supplies, damage causedto goods other than those supplied and claims by third parties. Here are afew examples:

• "To the maximum extent permitted by applicable law, in no eventshall the Lead X Company or any X group company or X's suppliers be liable for any indirect damages (including, without limitation, consequential damages, damages for loss of profits orrevenues, business interruption, loss of business information, orother loss) arising under or in connection with this MasterAgreement, and Enrollment Agreement, or the products licensedhereunder, even if advised of the possibility of such damages. Thelimitation of liability set forth in this section is not applicable to theextent damages are shown to be caused by intentional misconductor gross negligence of the Lead X Company or any X group company or any of their senior management personnel."

• "Neither X nor the Principals shall in any circumstances be liablein contract or tort or otherwise to the Client for any loss of investment, loss of contracts, loss of production, loss of profits, loss oftime, loss of use or any consequential or special loss or damagehowsoever caused or arising, directly or indirectly sustained bythe Client or by any other person, company or corporate bodywhatsoever. "

• "On no account, whether as a result of breach of contract, warranty, torts (including negligence) or otherwise shall either partybe liable for special incidental, indirect or consequential damagesof any nature whatsoever, such as but not limited to: loss of profitor revenue or clients, loss of use of plants or facilities or any associated equipment, capital costs, costs of substitute equipment, facilities or services, cost of purchase or replacement of gas, oilelectricity, etc. ... , loss of or damage to property or equipmentother than the delivered products, etc. ..."

• "In no event, whether as a result of breach of contract, tort liability (regardless of the degree of fault or negligence) or otherwise,and whether arising before or after completion of Seller's obligations under these Conditions of Sale or any Purchase Order pursuant thereto, shall Seller be liable to Buyer for losses or damagescaused by reason of unavailability of the Plant, Plant shutdowns orservice interruptions, (including, but not limited to, loss of use,profits or revenue, inventory or use charges, cost of purchase orreplacement power, interest charges or cost of capital, or claims of


Buyer's customers), or special, consequential or penal damages ofany nature."

Indirect damages may include bodily damages. However, such type ofprejudice seldom appears in lists of excluded damages, probably becausesuch a provision would often be invalid.37

The following clause institutes an interesting system: the exclusion ofindirect damages is itself set aside inasmuch as the obligor is able to recoverthem from his insurer or his contractual partners:

"CONTRACTOR shall not be liable for any loss sustained byOWNER of its anticipated profits from operation of PLANT orother consequential damages except to the extent CONTRACTORmay recover such losses from insurances carried by CONTRACTOR pursuant to the CONTRACT, vendors, subcontractors,renters of construction tools and equipment. CONTRACTOR shallexert all reasonable efforts and diligence to recover such lossesfrom such parties. In case such parties have to be sued, CONTRACTOR has first to reach agreement with OWNER; costs ofaction are on OWNER's account."

e. Exclusion of Unforeseeable Damages

Is the obligor liable for unforeseeable damages, or is he only liable forthe damages that he could foresee as a consequence of his breach? This isanother classical issue of the law of liability.38

This problem is sometimes confused with the question of indirect damages. It is true that the more indirect the damages, the less likely they areforeseeable. Yet, this is not always the case. Direct damages can be unforeseeable, while certain types of indirect prejudices may be anticipated easily.

Unforeseeable damages are less often envisaged in contractual clausesthan indirect damages. However, drafters do well to consider them, sincesome direct damages may take an unforeseeable development and thusdeserve particular attention when drafting clauses concerning liability.

An already mentioned clause, which refers to Article 1151 of theFrench Code, deals with this problem:

"Les penalites prevues au present article constituent les seulsdommages-interets susceptibles d'etre reclames par Ie Client

37 Cf. infra, p. 386.

38 Cf. infra, pp. 391-394.


conformement aux dispositions des articles 1150 et suivants duCode Civil."

The foreseeable character of the damages is alluded to in the nextclause, which considers various possibilities:

"Toute revendication de dommage et inten~~ts par Ie client, quelque soit son fondement, qu' elle ait un rapport direct ou indirectavec la commande, qu'elle trouve sa source dans la livraison ou l'utilisation de notre materiel, est aexclure dans la mesure OU nous,nos employes ou nos mandataires n'avons pas occasionne Ie dommage par notre negligence grave ou intentionnellement.

"En cas de negligence grave ayant entraine un dommage, la revendication de dommages et inten~~ts par Ie client qui est commen;antne peut depasser l'indemnisation du dommage previsible. Unerevendication de dommages et inten~~ts formulee par un client quin'est pas commen;ant, du chef de retard ou d'impossibilite d'execution suite aune negligence legere, ne peut depasser Ie quart duprix d'achat de ladite marchandise."

The problem of unforeseeable damages is dealt with in Article 26, 1 ofGeneral Conditions 188A of the Economic Commission for Europe:

"Dans Ie cas ou l'une des parties est tenue envers l'autre a desdommages-interets, ceux-ci ne peuvent exceder la reparation duprejudice que la partie fautive pouvait prevoir lors de la formationdu contrat."

f. Limitation of the Warranty to Refund, Replace or Repair the Object ConcernedClause of "Exclusive Remedy"

The warranty obligation of the seller varies according to the differentlegal systems, but the buyer usually has several possible remedies. In Frenchlaw, for instance, he has a choice between avoiding the sale or having theprice reduced (Article 1644 of the Civil Code); and if the seller has actedin bad faith, the buyer may additionally claim damages (Article 1648).Usual terms of warranty generally limit the seller's obligation to the refunding, replacing or repairing the object, thus excluding any other remedyprovided by law.

Here are several examples of such clauses:

• "Materials and articles sold or furnished by Buyer to Seller for theperformance of the Order shall be inspected and accepted bySeller prior to use or processing, and Buyer's responsibility for


defects is limited to replacement of such materials or articles ortheir value."

• "Every new aircraft tire or tube, manufactured by E bearing thatname and their serial number is guaranteed to be free fromdefects in workmanship and material. If our examination showsthat such tire or tube has failed under the terms of this guarantee,we shall either repair it or make a reasonable allowance on thepurchase of a new tire of same size, ply rating and speed rating."There is not other warranty or guarantee, express or implied,applicable to these products."

• "The sole liability of A hereunder shall be the repair and/orreplacement of Products, or parts thereof, returned to a NorthAmerican or European Manufacturing or Distribution Centre of Afollowing written notice of the defect given within the WarrantyPeriod. The repair and/or replacement shall be at the expense ofA, provided that examination of the Products or parts thereof byA, discloses that the Products of parts thereof are defective inmaterial and/or workmanship. In any event, all shipping costs toa North American or European Manufacturing or DistributionCentre of A shall be borne by the Distributor."Notwithstanding anything contained herein, A may authorize theDistributor to repair and/or replace the defective Products, or partsthereof, without their being returned to a North American orEuropean Manufacturing Centre ofA. However, the provisions of thisparagraph shall apply only in the event that the Distributor, prior tocarrying out such repair and/or replacement, has obtained the written consent ofA, which consent may be refused for any reason whatsoever. The failure to obtain such prior written consent shall be anabsolute bar to any recovery by the Distributor and/or any third partyin respect of alleged defect in material and workmanship."

Similar stipulations appear in contracts other than sales, to exclude anyother remedy than the modes of repair accepted by the obligor:

• "Exclusive Remedy-The indemnification provisions contained inthis Article 10 shall constitute the exclusive remedy of the Partiesin connection with this Agreement and the transactions contemplated hereby other than claims arising out of willful misconductor fraud of a Party."

• "En raison du caractere particulier des services lies au lancementd'une fusee porteuse vers l'espace, les parties ont convenu que laresponsabilite d'Arianespace et de son client du fait de l'inexecution de leurs obligations contracuelles est strictement limitee auxoonsequences expressement prevues dans Ie present contrat, a


l'exclusion de toute autre demande en dommages-interets ou enindemnites."39

g. Limitation of the Warranty as to the Warranty Enjoyed by the SellerTransfer of Warranty

When goods are subject to successive sales, this creates a series of successive warranty obligations, the coordination of which must be carefullyexamined.

One possibility is to have the warranty offered to the buyer mirror theone enjoyed by the seller himself. Such a stipulation is per se a means tolimit one's guarantee.

"Notwithstanding anything herein contained, with respect to thePrinter and the Disk Drives purchased by the Distributor, andforming part of the Products, the warranty of A shall be limited tothe extent that A is able to enforce a claim for liability against themanufacturer of such equipment."

Another technique consists of transferring to the sub-purchaser thewarranty for which the first seller is liable.4o This process is often used inaeronautics, where the manufacturer of an aircraft transfers to the buyerthe warranties for which the manufacturers of the various parts are liable.When such transfer is accompanied, at least implicitly, by a waiver of anywarranty claim against the manufacturer, we no longer deal with a limitative clause, but with an exemption clause.

This process can be likened to a frequent practice in leasing contracts.The leasing company wishes not to be involved in any litigation about technical issues concerning the machines under the contract. In its sales contract with the manufacturer, it inserts the following clause:

"Article 6. Garanties.

"Le vendeur s'engage afaire beneficier Ie locataire de la garantied' eviction et de la garantie des vices caches telles qu' elles resultentde la presente commande, de la loi et de l'usage. En cas de contestation relative notamment ala construction, au fonctionnementou au rendement du materiel livre, Ie locataire agit directement en

39 Clause quoted by L. Ravillon, Of}. cit., p. 239.

40 In certain legal systems, even in the absence of any contractual provision, courtsallow the sub-purchaser to exercise a direct claim against the initial seller (d., underFrench law,]. Ghestin & B. Desche, 'Haite des contrats-I~a vente, 1990, pp. 1036-1064).


garantie en vertu de la stipulation pour autrui dont il beneficie parles presentes, et du mandat d'agir en resolution de la vente."

On the other hand, the leasing contract signed with the lessee statesthat the latter will waive any claim against the lessor, since the possibility toact directly against the manufacturer is offered:

"3.5. Par derogation aux dispositions de l'article 1724 du Codecivil, Ie locataire renonce a toute indemnite et droit de resiliationvis-a-vis du bailleur, sauf benefice de la garantie du vendeur, memedans Ie cas OU Ie materiel est hors d'usage pendant plus de 40 jourspour quelque cause que ce soit.

"3.6. Contrairement aux articles 1719 et suivants du Code civil,tous les frais necessites par l'emploi, l'entretien et les reparationsdu materiel sont a la charge du locataire.

"4.1. Le locataire determinant les conditions techniques et financieres du contrat de vente en qualite de mandataire du bailleur,d'une part, disposant de la jouissance du materiel dans Ie cadredes presentes, d'autre part, etant susceptible de lever l'optiond'achat stipulee en l'article 8 ci-dessous enfin, beneficie de lagarantie donnee par Ie fabricant.

"4.2. Afin que cette garantie puisse s'exercer dans les meilleuresconditions, Ie locataire beneficie, aux termes des conditionsgenerales du bon de commande, d'une stipulation pour autrui, luipermettant d'intervenir directement pres du fournisseur et duconstructeur, et eventuellement d'exercer tous recours contre eux,dans Ie seul but d' obtenir la bonne execution du contrat de vente.

"4.3. Cependant, si Ie locataire, en sa qualite d'utilisateur dumateriel, estime necessaire d'agir a ses frais en resolution du contrat de vente, Ie bailleur proprietaire lui donne, a cette fin, par lespresentes, mandat d'ester, toutefois revocable pour justes motifs,les imperatifs commerciaux etant des a present consideres commetels. Dans l'une et l'autre hypothese, il doit informer prealablement Ie bailleur de son action et lui communiquer toutes piecesde procedure lui permettant de preserver ses droits."

III. ADDITIONAL REMARKS AND CRITICAL OBSERVATIONS

The main techniques used in drafting clauses limiting or excluding liability have just been analyzed. Our purpose now is to draw attention to the


problems of validity that may occur in connection with some of the abovementioned clauses, in the various legal systems (Section lILA), to emphasize the important issue of consequential and/or unforeseeable damages(Section III.B) , and to stress the close links between limitation and exemption clauses and insurance problems (Section IILC).

A. Problems of Validity

The validity of clauses limiting or excluding liability will be examinedunder domestic legal systems (in the European Union, domestic laws integrate certain European directives), various international instruments andprivate international law.

1. Domestic Legal Systems-Impact of European Directives

(a) Limitation and exemption clauses arouse suspicion in most, if notall, legal systems. They are a straightforward derogation of the principlesof liability, much influenced, at least in certain legal systems, by the moralvalues underlying the law of obligations. An obligor in breach should beliable for the damages he causes. At first sight, it should not be allowed toavoid liability. This situation is the more pre-occupying as it is often theresult of the dominant position of one of the parties.

Freedom of contract is an accepted principle in most countries, andclauses limiting liability are, a priori, valid, but many exceptions are obstacles to this validity. The main characteristic of such restrictions is that theyare of a great variety. In comparative law, the rules applicable to suchclauses are far from being harmonized. Negotiators of contracts should beaware of this fact. Before drafting such clauses, it is necessary to be fullyconversant with the principles within the law applicable to the contract. 41

41 The following presentation will often refer to various studies prepared by members of the Group on their own legal systems, and published with the oiriginal versionof this study: P. Larere, Les clauses limitatives et exoneratoires de responsabilite en droitfran<,;ais, I.B.!"]., 1985, pp. 479-481; X. Malengreau, La clause d'exoneration de responsabilite en droit beIge, I.B.LJ, 1985, pp. 483-486; O. Boschetti, Notes on ExemptionClauses under Italian Law, I.B.LJ, 1985, pp. 487-490; R. Pelletier, Les clauses d'exoneration et de limitation de responsabilite en droit mexicain, I.B.LJ, 1985, pp.491-493; M. Strauch, La loi allemande sur les conditions generales et les clauses limitatives de responsabilite, I.B.LJ, 1985, pp. 495-507; L. Arentz-Hansen, The WingullArbitration Award of 1978, I.B.LJ, 1985, pp. 509-511; P. Ellington, Exclusion Clauses inEnglish Law, I.B.LJ, 1985, pp. 513-515; B. Hanotiau, Les clauses d'exclusion et de limitation de garantie et de responsabilite en droit americain, I.B.L.], 1985, pp. 517-523;PJ. Thys et M.J. Golub, Limiting a Seller's Liability under United States Law inCommercial and Government Contracts, I.B.LJ, 1985, pp. 523-528. Those studies werewritten in 1985 and are not up to date any more. Domestic systems have evolved. In theEuropean Union, the impact of the directives mentioned in the text has been felt. Amore recent basic reference, though it is itself more than ten years old, is that of a col-


However, in the European Union, two important directives have broughtdomestic rules concerning limitation and exemption clauses closer together.

The Directive of April 5, 1993 on unfair terms in consumer contracts12

considers as unfair, in contracts which have not been individually negotiated, clauses that are contrary to the "requirement of good faith," cause "asignificant imbalance in the parties' rights and obligations arising underthe contract, to the detriment of the consumer" (Article 3.1). MemberStates must provide that such clauses are not binding on the consumer(Article 6). An annex to the Directive gives an indicative, but not exhaustive, list of clauses that may be declared unfair, including certain types ofclauses limiting and excluding liability.

On the other hand, the Directive of May 25, 1999 on the sale of consumer goods and associated guarantees43 provides that under conditionsset by domestic law, the consumer is not bound by any contractual terms oragreements concluded with the seller beforl! the lack of conformity is brought to theseller's attention which directly or indirectly waive or restrict the rights resultingfromthis Directive (Article 7).

On the domestic level, rules applicable to clauses limiting or excludingliabilty sometimes derive from general norms. See, for instance, in some ofthe most important codifications, Section 276, 2° of the German CivilCode, Article 100 of the Swiss Code of Obligations, Article 1229 of theItalian Civil Code, Article 1102 of the Spanish Civil Code and Article 1474of the Civil Code of Quebec. On the contrary, in countries like France orBelgium, the Civil Code does not mention clauses limiting or excluding liabilty and the applicable solutions are based on case law.

In specific contracts, a greater number of texts regulates the problemof clauses limiting liability. For instance, such clauses in contracts of saleare ruled by Sections 2-316 and 2-719 of the American Uniform Commercial Code. 44 Also see, as examples in Italian law, Articles 1487 et 1490of the Civil Code (sales), Article 1579 (rent), Article 1681 (carriage),

loquium organized in Paris in 1990: Les clauses lirnilalives ou exoneraJoires dere,ljJOnsabilileen Eumpe,J. Ghestin, (ed.), Paris, 1990,361 pp. Other comparative reviews are foundin E. Von Hippel, The Control of Exemption Clauses. A Comparative Study, 16 Int.Cornp. LQ, 1967, pp. 591-612, and mainly G. Eorsi, The Validity of Clauses Excludingor Limiting Liability, 23 Arner. I of CmnfJ. Law, 1975, pp. 215-235. Cf. also, for an interesting comparative study applied to a particular sector~ L. Ravillon, Les leler;ornrnunialionspar satellites, Aspects furidiques, Paris, 1997, pp. 246-287.

12 OffJourn., April 21,1993, L. 95/29.

43 OIfJourn.,july 7,1999, L. 171/12.

44 Cf. B. Hanotiau, op. cit., pp. 517-518.


Article 1713 (agency) and Article 1785 quater (deposit) ;4:) in Mexican law,Article 15 paragraph 13 of the law on transfers of technology.16

Under certain jurisdictions, limitation clauses are also affected by special provisions regulating general conditions or abusive clauses; this is thecase in Germany with the law on general conditions of 1976 (AGB Gesetz,integrated in the BGB since 2002), in England with the Unfair ContractTerms Act of 1977,47 in France with the Decree of March 24,197848 and inthe Netherlands, with Article 237e of the NBW.49 Some of these texts hadto be aligned with the provisions of the European Directive ofApril 5, 1993on abusive clauses; EU countries, which did not have such regulations yet,had to implement them. so

Rules may be different depending on the expertise of the parties (business professionals or consumers; men of the trade or not). Examples: a presumption of "bad faith" is imposed on the professional seller under French5l

and Belgian52 law; the German rules on general conditions establish distinctions depending on whether the customer is a tradesman himself or not;S3the French law on protection and information of the consumer also distinguishes between professional and non-professional parties.54

(b) Apart from legal texts, which avoid definite forms of limitation andexemption clauses, the validity of such clauses may be questioned mainlyin the following cases:55

1. Fraud or wilful breach on the part of the obligor always invalidatesclauses limiting or excluding liability. This is probably the only

45 Cf. O. Boschetti, op. cit., pp.489-490.

16 Cf. R. Pelletier, ofl. cit., p.493 .

47 Cf. P. Ellington, op. cit., p 514; Cheshire Fifoot & Funnston, op. cit., pp. 184-203;R. Lawson, Exclusion Clauses and Unfair Contract TeTfflS, 7th eel., 2003.

18 Cf. F. Terre, Ph. Simler & Y Lequette, op. cit., pp. 488, 490-492.

49 Cf. E. Hondius, Droit neerlandais, in Les da/uses limitatives ou exoneratoires de resfJOnsabiliteenEumpe,J. Ghestin, (eel.) , Paris, 1990, op. cit., pp. 291-292.

Cf., for instance, concerning England, the Unfair Terms in Consumer ContractsRegulation 1994 (Cheshire Fifoot & Funnston, ofl. cit., pp. 203-205).

51 Cf. P. Larere, op. cit., pp. 480 et seq.

52 Cf. X. Malengreau, op. cit., pp. 484-485.

53 Cf. M. Strauch, ofl. cil., p. 496.

54 Cf. F. Terre, Ph. Simler & Y Lequette, op. cit., pp. 490-491, 492.

55 This short presentation will be accompanied by references to domestic legal systems; we will give preference to the studies written by members of the working group.These studies were written in 1985; a few more recent references will be added.


point where the solution is unanimous.s6 As has already been mentioned, in some countries, the professional seller is automaticallyassumed to have acted in bad faith, and this affects the validity ofclauses limiting liabilityJi7

2. Domestic systems do not agree in the case of gross negligence.Such conduct precludes the application of the clause in Italy,58GermanyS9 and France/iO but not in Belgium61 or Mexico. 62

The right to exempt oneself from the fraud or gross negligence committed by one's employees is also assessed differently indifferent countries.63

3. Clauses limiting liability are sometimes set aside when they affectthe very substance of the obligation (obligation videe de sa substance) 64or when they concern a m~or obligation (Kardinalpflicht). 65 The common law has a similar approach under the theory of fundamentalbreach, but the matter is rather complex. 66 Recently, the FrenchCour de Cassation has ruled against a limitation clause that contradicted the essential character of the undertaking by a specializedfirm to deliver mail rapidly.67

4. The validity of limitation and exemption clauses is sometimesassessed according to their "reasonableness." This is the case under

56 Cf. P. Larere, op. cit., p.479; X. Malengreau, op. cit., p. 484; O. Boschetti, op. cit., p.487; M. Strauch, Of}. cit., p. 504; R. Pelletier, Of}. cit., p. 492; P. Ellington, Of}. cit., p. 513; B.Hanotiau, Of}. cit., p.517; L. Ravillon, Of}. cit., pp. 255-256;J.M. Mousseron, Technique r:ontractuelle, Paris, 2nd eel., 1999, No. 1423.

57 Cf. P. Larere, op. cit., .p. 480; X. Malengreau, op. cit., pp. 484-485.

58 Cf. O. Boschetti, of}. cit., p. 487.


60 Cf. P. Larere, op. cit., p. 479; L. Ravillon, op. cit., pp. 256-258;J.M. Mousseron, op.cit., No. 1423.

61 Cf. X. Malengreau, op. cit., pp. 484-485; G. Eorsi (op. cit., p. 218) points out thatthis position of Belgian case-law goes against the general tendency, which is increasinglysevere towards clauses limitating or excluding liability.

62 Cf. R. Pelletier~ Of}. cit., p. 492.

63 Compo P. Larere, op. cit., pp. 480 et seq. about France, and X. Malengreau, op. cit.,p. 484 about Belgium.

64 Cf. P. Larere, Of}. cit., pp. 480 et seq.; L. Ravillon, Of}. cil., pp. 258-260; J.M.Mousseron, Of}. cit., No. 1425-1426.


66 Cf. P. Ellington, op. cit., p. 514; Cheshire Fifoot & Furmston, op. cit., pp. 180-184.

67 Casso fr., October 22,1996, Dall., 1997,J, 121, note Seriaux (Chronopost). On thisdecision, d. also J.M. Mousseron, op. cit., No. 1425.


Section 2-316 of the American Uniform Commercial Code,6s andSection 3 of the English Unfair Contract Terms Act. 59

5. It is sometimes illegal to introduce a clause modifying the systemof tortious liability. This is the case in France70 and Mexico,'l butnot in Belgium72 or Italy.73

6. Often limitation and exemption clauses cannot be applied whenthe liability concerns personal injuries. This solution is adopted bythe English Unfair Contract Terms Act. 71 It is also applicable inFrance, in spite of some discussion,75 but such a restriction doesnot exist in Belgium.76 The Directive of April 5, 1993 on unfairterms in consumer contracts avoids clauses excluding or limiting thelegal liability of a seller' or supplier' in the event of the death of a consumeror personal injury to the latter resulting from an act or omission of thatseller or supplier (Annex, Article 1a).

7. When a clause limiting liability also serves as a liquidated damagesclause,77 it is subject to the solutions that may regulate such clausesin the law applicable to the contract.n; Article 1152 of the FrenchCivil Code is worth mentioning in this context: this provisionempowers the judge not only to decrease an excessive clause penale,but also to increase one that would be manifestly insufficient tocompensate for the loss.79

8. Compliance with formal requirements may be demanded. See,e.g., Section 2-316 of UCC: any modification to the warranty ofmerchant quality must use the term "merchantability" and, whenit is in writing, it must be formulated in a very apparent manner. so

68 Cf. B. Hanotiau, of}. cit., pp. 517-518.

69 Cf. P. Ellington, ap. cit., p.514.

70 Cf. P. Larere, ap. cit., p. 479;J.M. Mousseron, ap. cit., No. 1422.

71 Cf. R. Pelletier, Of}. cit., p. 492.

72 Cf. X. Malengreau, ap. cit., pp. 483-485.

73 Cf. O. Boschetti, ap. cit., p. 487.

74 Cf. P. Ellington, Of}. cit., p. 514; Cheshire Fifoot & Furmston, Of}. cit., pp. 188-196.

75 Cf. P. Larere, ap. cit., p. 480 et seq.;J.M. Mousseron, ap. cit., No. 1427.

76 Cf. X. Malengreau, ap. cit., p. 484.

77 Cf. SUfJTCl, pp. 338-340.

7S On these solutions, d. supra, pp. 342-346, as well as the different studies published in D.PC/., 1982, pp. 443-524.

79 Cf. F. Terre, Ph. Simler & Y Lequette, Of}. cit., pp. 493-501.

so Cf. B. Hanotiau, ap. cit., p. 518; P. Thys & MJ. Golub, ap. cit., pp. 524-525.


9. Limitation and exemption clauses may be restricted by the generalprinciples of legislation concerning unfair terms.Sl See for instanceSection 2-302 of UCC on "unconscionability,"82 and Section 36 ofNorwegian Law of Contracts, which condemns clauses the application of which would be "unreasonable," or contrary to "goodtrade usages."83 Such an approach has been generalized in theEuropean Union with the Directive of April 5, 1993.84

10. Finally, limitation and exemption clauses, which are part of standard contracts, may have to meet the requirements imposed bysome regulations on the validity of such contracts and the clausesthey contain. See Article 1341 of the Italian Civil Code, requestingexpress and written approval of the other party.85

On a more general level, limitation or exemption clauses are effectiveonly when the other party has been in a position to consent to them whenconcluding the contract-a requirement that is not always satisfied in contracts of adhesion.86

On the other hand, when such clauses are part of pre-established standard general terms, they may often be subject to restrictive interpretation,contra proferentem.87

Thus, the techniques used to judge the validity of limitation andexemption clauses are quite diverse and they differ in natures. When drafting such clauses, one should really make sure that they are in accordancewith the law applicable to the contract.

The first part of this study mentioned the case of clauses concerningpre-contractual representations, attempting to exempt the beneficiary fromthe effects of non-disclosure or misrepresentation.88 Is it fitting to apply thesame principles as those that apply to limitation and exemption clauses,and to decide their validity on the same bases?

81 Independently of the specific rules on limitation and exclusion clauses which mayappear in such regulations (cf; supra, p. 384); an example was given concerning personal injury.

82 Cf. B. Hanotiau, op. cit., pp. 519-520.

83 Cf. L. Arentz-Hansen, Of). cit., p. 511.

S4 Cf. e.g., about France,j.M. Mousseron, op. cit., No. 1427-1428.

85 Cf. O. Boschetti, op. cit., p. 488; on German law, cf. M. Strauch, op. cit., p. 499.

86 Cf. X. Malengreau, of). cil., p. 483.

S7 Id., p. 484.

88 Cf. supra, pp. 353-354.


That question has not yet been sufficiently discussed and it woulddeserve a more thorough examination under the different legal systems.

In certain cases, similar principles must apply. In insurance contracts,a clause of incontestability cannot cover fraudulent non-disclosure or misrepresentation;89 this is often explicitly specified.

In the above-mentioned clause excluding liability for the technicalinformation contained in an advertisement,90 the group wonderedwhether such a clause did not make affect the substance of the obligation. Was it an offer, or simply advertising literature? If it were an offer,even those legal systems, which regard the offer as binding, recognizethat this binding character can be set aside by making a non-committaloffer. 91 The validity of so-called entire agr-eement, or four corner agreementclauses, by which an agreement is limited to what is expreSSly included inthe terms of the contract, thus excluding all pre-contractual documents,is also not questioned.92

Such considerations would appear to argue in favor of the validity ofthe above clause. However, would it still be considered valid if it wereinvoked in the case of dolor fraudulent misrepresentation? It would probablybe invalidated in the former case, under systems that know the concept ofdol as a vice affecting consent. In English law, Section 8 of the UnfairContract Terms Act, makes a clause limiting liability or remedies in case ofmisrepresentation invalid, unless it is reasonable.

2. International Instruments

In some international agreements, the system of contractual liability isa difficult compromise between the interests of the parties, so that contractual deviations are often excluded.

Here are two examples:

• "Any provision tending to relieve the carrier of liability or to fix alower limit than that which is laid down in this Convention shall benull and void, but the nullity of any such provision does not involvethe nullity of the whole contract, which shall remain subject to theprovisions of this Convention" [Art. 23 of the Warsaw Conventionon air transport].

89 Cf. Y Lambert-Faivre, Droil des assuraru;es, 10th ed., 1998, No. 915.

90 Cf. supra, p. 353.

91 Cf., for instance, about Section 145 of the BGB, D. Medicus, Allgerneiner Teil desBGB, 5th ed., 1992, p. 137.

92 On such clauses, d. supra, Chapter 3.


• "1. Subject to the provisions of article 40, any stipulation whichwould directly or indirectly derogate from the provisions of thisConvention shall be null and void. The nullity of such a stipulationshall not involve the nullity of the other provisions of the contract."2. In particular, a benefit of insurance in favor of the carrier orany other similar clause, or any clause shifting the burden of proofshall be null and void" [Art. 41 of the C.M.R. Convention on roadtransport] .

The Unidroit Principles on International Commercial Contracts contain the following provision on exemption clauses:

"A clause which limits or excludes one party's liability for non-performance or which permits one party to render performance substantially different from what the other party reasonably expectedmay not be invoked if it would be grossly unfair to do so, havingregard to the purpose of the contract" [art. 7.1.6].

The Principles have elected to retain "gross unfairness" as the standardfor invalidity, thus introducing yet another approach to the other commoncriteria, indicated above.93 The solution has been criticized.91

The Principes of European Contracts nevertheless resort to a similarstandard. They provide that "A clause which limits or excludes one party'sliability for non-performance may not be invoked if it would be grosslyunfair to do so" (art. 8.109).

3. Private International Law

(a) In an international contract, does a limitation or exemptionclause remain subject to the law of the contract according to which itsvalidity could not be challenged, when it would be illegal under the lexfori? Such a situation could, for instance, occur before a French court inthe presence of a clause excluding tort liability, when the contract is subject to Belgian law.95

The issue is whether principles governing the validity of limitation andexemption clauses only belong to internal public policy, or can such prin-

93 Cf. SLlfJTa, pp. 384-386.

94 Cf. M. Fontaine, Les clauses exoneratoires et les indemnites contractuelles dansles Principes d'Unidroit: Observations critiques, in Uniform I~aw Studies in Memory ojMalcolm Hvans, Int. Uniform I~aw Rev. (Rome), 1998, pp. 405-417.

95 Cf. sUfJr(J" p. 386. On this question, d. A. Toubiana, Le dmnaine de la loi du r:onlralen droit international prive, Paris, 1972, pp. 44-46; P. Lagarde, Droit international prive, inI~es clauses limitatives ou exoneratoires de responsabilite en Hurope, J. Ghestin, (ed.), Paris, 1990,pp. 17-41; L. Ravillon, op. cit., pp. 246-254.


ciples may, on certain grounds (such as "ordre public international' or"directly applicable rules," "lois de police," "lois d'application immediate"), overrule the more tolerant solutions of the law of the contract.

The matter does not arise when the liability at stake is governed by aninternational agreement that forbids, in a mandatory way, any deviationfrom its system, as is often the case in the sector of international carriage.96

On the other hand, the Vienna Convention on the international sale ofgoods explicitly does not cover the validity of the contract and of the different clauses (Art. 4a), thus abandoning the fate of limitation and exemption clauses, in principle, to the domestic applicable law.97

As regards this applicable law, the well-established principle is that ofparty autonomy.98 There is also no challenge that limitation and exclusionclauses are subject to such law of autonomy.99 Thus, according to Article 10of the Rome Convention ofJune 19, 1980, the law of the contract is applicable to "... the consequences of breach, including the assessment of damages in so far as it is governed by rules of law."

Accordingly, the validity of a clause limiting or excluding liability will,in principle, be decided according to the law of the contract. This could,however, be different in two situations.

First, the clause at stake could be incompatible with the ordre publicinternational of the forum. IOO The French Cour de Cassation has avoided adecision, which had not verified whether some clauses, in a contract subject to Belgian law, were in accordance with the French concept of international public policy.IOI When would the ordr-e public international of theforum enter into consideration? One could think of clauses attempting toexclude liability for willful misconduct, or even, in countries that prohibitsuch agreements, clauses excluding liability for gross negligence,102 tort liability or personal injury.103

96 See examples ,\'LlfJTa, pp. 388-389.

97 Cf. P. Lagarde, op. cit., pp. 20-21; E. Rawach, La validite des clauses exoneratoiresde responsabilite et la Convention de Vienne sur la vente internationale de marchanduses, Rev. Int. Dr. Comp., 2001, pp. 141-157.

98 Cf. P. Mayer, Droit international fJTive, Paris, 5th ed., 1994, pp. 454-491.

99 Cf. P. Lagarde, op. cit., pp. 21-23; Casso fr., Dec. 5, 1910, Sir:, 1911, 1, 129, noteLyon-Caen; Casso fr., Oct. 4,1989, Rev. Crit.lJr: Int. pr., 1990, p. 316.

100 Cf. P. Lagarde, Of}. cit., pp. 31-35; L. Ravillon, Of}. cit., pp. 251-254.

101 Casso fr., 16 avril 1991, Bull. Civ., IV, No. 147; d. L. Ravillon, op. cit., pp. 252-253.

102 Cf. Aix, 27 fevrier 1980, Gaz. Pal., 1982.2.783.

103 Cf. sUfJTa, pp. 382-389.


The second situation where the law of the contract might be superseded is when a clause limiting or excluding liability infringes upon "immediately applicable" mandatory rules (lois de police) .104 The Rome Conventionprovides that its rules cannot restrict the application of the rules of the law of theforum in a situation where they are mandatory irrespective of the law otherwiseapplicable to the contract (Article 7 Section 2). This will probably be often thecase with consumer protecting regulations. 105

It has also been argued that clauses limiting or excluding liabilitywould, in principle, be valid in international trade, since the internationalcharacter of the contract would exclude the application of domestic limits to their validity. 106

(b) Some statutes take sides on the issue of the validity of limitationand exemption clauses in contracts subject to foreign law. For instance, theEnglish Unfair Contract Terms Act does not apply to a contract, which issubject to foreign law, except when the choice of the law was prompted bythe wish to avoid the application of the Act. l07

B. Consequential and/or Unforeseeable Damages

The problem of consequential or unforeseeable damages is one of themost difficult items to deal with when drafting a clause limiting or excluding liability. lOS

101 Cf. P. Lagarde, op. cit., pp. 35-38; L. Ravillon, op. cit., pp. 249-250.

105 Cf. P. Lagarde, Of}. eil., pp. 35-38, but this author's opinion is balanced. CompoL. Ravillon, op. cit., p. 250: "... il ne semble pas que fusqu 'iz present les clauses amenageant conventionnellement la responsabilite aient ete le terrain d'application des lois de police."

106 Cf. ICC Arbitral award rendered in 1975, published and commented in S.Jarvin& Y Derains, ICC Arbitral awards, 1974-1985, Deventer, 1990, pp. 262-273; B. Audit, Laventeinternationale de man:handises, Paris, 1990, p. 116; compare P. Lagarde, op. cit., pp.38-40.

107 Cf. Cheshire Fifoot & Funnston, Of}. eil., pp. 182-183. The German law on generalconditions used to submit the validity of the choice of foreign law, in a contract with aperson not engaged in commerce, to the existence of a recognized interest in thatchoice (Section 10-8 ancien; d. M. Strauch, op. cit., pp. 497-499). The provision hasbeen repealed.

108 Cf. H. Dubout, La notion de dommage consecutif ou indirect dans les contratsinternationaux, Cah. fur. et fisc. de l'export., 1986, pp. 1249-1264; J. Lookofsky,Consequential damages in comparative context. From breach ojpromise to monetary remedy in theAmerican, Scandinavian and international law oj contracts and sale, Copenhague, JuristForlag, 1989,330 pp.; U. Draetta, The notion of consequential damages in the international trade practice, a merger of common law and civil law concepts, I.B.LJ, 1991, pp.487-498; D. Philippe, A propos du dommage indirect et imprevisible et des clauses s'yrapportant, I.H.I~j., 1995, pp. 171-197.


Non-performance of a contractual obligation normally causes directand foreseeable damages; at the time of contracting or later, the obligoris in a position to assess the risks he is running if he does not fulfill hisobligations. The borrower who, by negligence, loses the borrowed objectand cannot return it is fully aware that the obligee's assets will be diminished by the value of the object and that he will be liable for it. But veryoften, the consequences of a default are more extended, either becauseconsequential damages add up to direct damages (for instance, the lenderwas going to sell the lost object with a profit), or because the damagesdirect or consequential-assume an unforeseen magnitude (the lost objecthad an exceptional value that the borrower was not aware of).

Examples of consequential or unforeseeable damages have beenshown earlier. 109 Reference can also be made to the Norwegian arbitralaward rendered in 1978 in the Wingull case. 110 The defective performanceof a ship apparatus worth 300,000 Norwegian crowns had eventually causedindirect damages of 16 million crowns!

The status of consequential or unforeseeable damages must be considered with special care when drafting clauses limiting or excluding liability.lll But references to consequential or unforeseeable damages are notalways drafted with the necessary skill. They sometimes neglect the specificities of the law applicable to the contract, and often they are missing altogether in limitation clauses. We would like to insist on the importance ofthis issue with the following general observations:

How extensive is the obligation to compensate for loss? The liableobligor must certainly indemnifY direct and foreseeable damages. But whatabout consequential damages? Unforeseeable damages? In most legal systems, limits are set to the extent of the damages for which the obligor atfault is liable. But not all solutions are alike. Before drafting a provision, itis indispensible to research the legal system intended to be modified.

The position of French and Belgian law on this point is expressed inArticles 1150 and 1151 of the Civil Code. Both texts limit the liability of theobligor in case of consequential and unforeseeable damages. Case law,however, is often more favorable to the aggrieved party. 112 In common law,the famous Hadley v. Baxendalel13 case applies principles that are similar to

109 Cf. supra, pp. 373-378.

110 Cf. L. Arentz-Hanssen, op. cit., pp. 509-511.

111 Cf. SU!JTCl, pp. 373-378.

112 Cf. F. Terre, Ph. Simler & 1'. Lequette, op. cit., pp. 538-540, 579.

113 9 Ex. 341, 156 Eng. Rep. 145 (1854).


those of French law. 114 But in German and Scandinavian law, the doctrineof adequate causation (all prejudice deriving in an adequate manner fromthe contractual breach must be indemnified) leads to a greater liability forindirect damages. II5

Article 74 of the Vienna Convention on the international sale of goodsadopts a similar position:

"Damages for breach of contract by one party consist of a sumequal to the loss, including loss of profit, suffered by the otherparty as a consequence of the breach. Such damages may notexceed the loss which the party in breach foresaw or ought to haveforeseen at the time of the conclusion of the contract, in the lightof the facts and matters of which he then knew or ought to haveknown, as a possible consequence of the breach of contract."

The Unidroit Principles on international commercial contracts entitlethe aggrieved party to full compensation for harm sustained as a result of the nonperformance, including any loss which it suffer-ed and any gain of which it wasdeprived (Article 7.4.2.). However:

"The non-performing party is liable only for harm which it foresawor could reasonably have foreseen at the time of the conclusion ofthe contract as being likely to result from its non-performance"[art. 7.4.4].

The Principles of European contracts law have similar provisions, withthe exception that they discard the exclusion of non-foreseeable damageswhen the breach was intentional or grossly negligent (Articles 9.502 and9.503).

These various solutions are seldom mandatory and the validity ofclauses excluding or limiting liability for consequential and/or unforeseeable damages is not threatened by specific causes of invalidity other thanthose that may affect limitation and exemption clauses in general (willfulmisconduct, gross negligence, unreasonableness, etc.).

There is an exception in Section 2-712 (1) of the American UCC, stating that "consequential damages may be limited or excluded unless the lim-

114 The inspiration was deliberate, according to R. Danzig, Hadley V. Baxendale: AStudy in the Industrialization of the Law,journ. oj loegal Studies, 1975, p. 257. On morerecent interpretations, cf. M. EIland-Goldsmith, Les principes generaux du droit anglaisdes contrats et les operations internationales, D.PC.I, 1980, pp. 465-466.

m Cf. J. Hellner, Consequential Loss and Exemption Clauses, OxJOJd J. of LegalStudies, 1981, p. 14; Palandt, op. cit., p. 265.


itation or exclusion is unconscionable."1l6 It will also be recalled that manylegal systems forbid the application of clauses limiting liability to compensation for personal injuries,1l7 which, in contractual matters, are often indirect damages. IIS

Drafters of clauses limiting or excluding liability are thus advised to beextremely careful when it comes to consequential and/or unforeseeabledamages. Considerable interests may be at stake, and there are significantdifferences between the solutions given by the various domestic legal systems and court interpretations,

In the above analysis,1l9 various examples of possible wording havebeen given. One shall take care to use the terminology adapted to the lawapplicable to the contract, and to take into account the mandatory rulesthis law may contain. When different types of excluded damages arelisted, each item has to be considered in light of the possible consequences, in the case of non-performance, and the obligor's interest inkeeping such a list specific.

C. Limitation Clauses and Insurance

Insurance often has an impact on exemption or limitation of liabilityclauses, either by influencing the contractual wording or by affecting thevalidity of clauses.

1. Influence on Contractual Practice

It is well known that close links exist between liability and insurance.This correlation is apparent in the area of exemption or limitation of liability clauses, where the insurability of the risks concerned is at the originof some interesting techniques. Here are a few illustrations:

a. The Obligee Is Insured

The fact that the obligee takes out property insurance may result in anexemption of liability for the obligor and in a reduction of the contractualprice. The following example is taken from a contract for maintenance andsupply of spare parts:

"The parties have agreed that it is more practicable for theCustomer to effect insurance in respect of any loss or damage of

116 Cf. B. Hanotiau, op. cit., p. 517.

117 Cf. SU!JTCl, p. 386.

llS But not always: d. contracts for carriage of persons or medical care.

119 Cf. supra, pp. 373-378.


any kind which may arise out of or in connection with the performance of the Services under this Agreement, and the Fee has beenreduced accordingly. It is therefore agreed that the Company willnot be liable in any circumstances whatsoever for loss or damageof any kind suffered by the Customer or by any third party howsoever caused unless the same shall relate to personal injury or deathand only then if the same shall arise out of the Company's negligence. Save as aforesaid the Company shall be under no liabilitywhatsoever under or in connection with this Agreement whetherperformance or manufacture be by itself or of any other personsand any condition or warranty which might otherwise be impliedor incorporated by the contract or by reason of Statute or Common Law is hereby excluded."

Besides a reduction in the price, the obligee may also prefer the security afforded by an insurance company against the uncertainty in case of anaction in liability. This has reportedly been the position of some oil companies towards builders of oil rigs.

Such a waiver of claim on the obligee's part, however, constitutes forthe insurer an important element in assessing the risk, since it makes subrogatory claims impossible. Consequently, the insured should declare suchwaiver to the insurer, in order to avoid the consequences provided by insurance law in case of non-disclosure. 120

The following clause concerns this issue:

"Sans prejudice des dispositions contraires du present contrat, X et Yrenoncent reciproquement atout recours qu'ils pourraient exercerl'un contre l'autre, sur une base tant contractuelle que delictuelle,pour tout dommage subi par ou al'occasion de ce contrat.

"Les parties s'engagent aporter cette renonciation a la connaissance de leurs assureurs.

"En consequence, les polices d'assurance de chaque partie devrontprevoir que l'assureur renonce atout recours contre l'autre partie."

It has been noticed that the exemption from liability is reciprocal.

One should also see that the insurance actually covers all the damagesfrom which the supplier is exempted (e.g., indirect damages). If this is notthe case, clauses like the following one are used.


So-called "benefit of insurance" clauses are sometimes declared void (d. infra,p.399).


In a car sales contract, the insurance taken out by the buyer only exonerates the seller within the limits of the coverage it provides; over andabove these limits, the seller is liable again:

"En cas de dommage cause par une negligence legere, Ie vendeurvoit sa responsabilite engagee pour autant que Ie dommage depasseles prestations des assurances sociales, d'une assurance accidents oud'une assurance degats materiels et que Ie dommage aux tiers nesoit pas couvert par l'assurance automobile obligatoire."

b. The Obligor Is Insured

If the obligor is insured against liability, limitation clauses may appearless useful. They still are useful, however, when the insurance coverage islimited, as it frequently is. The obligor shall then take care to adjust theextent of his liability to the coverage provided by the insurance. It sometimes works the other way around: the existence of a limitation clause willenable the obligor to obtain a cheaper insurance policy.

Here is an example of a clause limiting liability to the amount that theobligor can recover from other sources, especially from the insurance.

"CONTRACTOR shall not be liable for any loss sustained byOWNER of its anticipated profits from operation of PLANT orother consequential damages except to the extent CONTRACTORmay recover such losses from insurances carried by CONTRACTOR pursuant to the CONTRACT, vendors, subcontractors,renters of construction tools and equipment. CONTRACTOR shallexert all reasonable efforts and diligence to recover such lossesfrom such parties. In case such parties have to be sued CONTRACTOR has first to reach agreement with OWNER; cost ofaction are on OWNER's account."

The situation changes when the obligor waives the limitation of his liability if the customer (obligee) accepts to bear the cost of the liability insurance. See the following example, where a consulting firm limits its liabilityto the amount of its fees:

"S'il est reconnu, au benefice du client, un droit a reparation duprejudice direct subi, Ie montant de l'indemnite correspondantene pourra exceder un maximum fixe au contrat. Quoi qu'il ensoit, la responsabilite du bureau d'etudes techniques est tOl~oursproportionnee au montant de ses honoraires relatifs a l'ouvrageincrimine et les dommages-interets qui peuvent lui etre reclamesne peuvent, en aucun cas, depasser ce montant. Dans Ie cas OU Ie


client exigerait une couverture des responsabilites depassant cettelimite, une assurance speciale sera prise par Ie bureau d'etudestechniques aux frais du client."

In this example, it is the liability towards third parties which is coveredby insurance, the cost of which is borne by the customer, covering, as well,damages to the equipment to be used by the consulting engineer and purchased at the client's expenses:

"Sauf avis contraire exprime par ecrit par Ie client, l'ingenieur-conseil devra, aux frais du client, prendre et renouveler pour untemps et dans des conditions ayant l'approbation du client, uneassurance adequate de responsabilite civile contre la perte ou lesdommages subis par les equipements acquis, au moyen de fondsfournis par Ie client, pour Ie seul usage de l'ingenieur-conseil, dansIe cadre de l'execution des Services, sous reserve que l'ingenieurconseil fasse de son mieux pour souscrire ases frais une assurancecouvrant raisonnablement ses risques professionnels."

Here, insuring liability towards third parties is imposed upon the consultant, but the cost is not directly borne by the client:

"The Consultant shall take out and/or maintain adequate Insuranceagainst third party liabilities in accordance with good recognizedpractice of reputable international professional engineers andconsultants."

This clause is linked to a hold-harmless undertaking by the consultantbenefiting the client, in case of third-party claims.

The limitation of liability stipulated in the contract is sometimes applicable only over and above what the seller can himself recover from varioussources, especially from his insurance contracts.

"The limit of cumulative liability under paragraph B shall be overand above contractors's own services to be performed pursuant toabove paragraph B-a plus any indemnification recovered fromvendors, subcontractors (contracted in name and on behalf of),and insurances carried by CONTRACTOR pursuant to theCONTRACT."

c. The Exemption Clause Renders Insurance Unnecessary

Some contracts signed by the American government-especially concerning defense-contain limitation of liability clauses favorable to the contractor, because the government intends to remain its own insurer and


does not wish the price of the contract to be increased by the cost of a liability insurance. Here is an example: 121

"a) Except for remedies expressly provided elsewhere in this contract, the Contractor shall not be liable for loss of or damage toproperty of the Government (excluding the supplies deliveredunder this contract) occurring after acceptance of the suppliesdelivered under this contract and resulting from any defects ordeficiencies in such supplies."b) The foregoing limitations shall not apply when the defects ordeficiencies in such supplies or the Government acceptance ofsuch supplies resulted from willful misconduct or lack of goodfaith on the part of any of the Contractor's directors or officers, oron the part of any of his managers, superintendents, supervisionor direction of:• "(i) all or substantially all of the Contractor's business; or• "(ii) all or substantially all of the Contractor's operations at

anyone plant or separate location, in which this contract isbeing performed; or

"c) Notwithstanding paragraph (a) above, if the Contractor carries insurance or has established a reserve for self-insurance covering liability for damages or losses suffered by the Governmentthrough purchase or use of the contract supplies required to bedelivered to the Government under this contract, the Contractorshall be liable to the Government to the extent of such insuranceor reserve for self-insurance for damages or losses to property ofthe Government occurring after acceptance of the supplies delivered to the Government under this contract and resulting fromany defects or deficiencies in such supplies."

The wish to avoid insurance costs is revealed in some contracts signedby NASA concerning the use of the space shuttle: in this case, it is the possible liability of the contractor towards third parties that is covered byNASA, this time in the form of a hold-harmless agreement. 122

2. Insurance and the Validity of Exemption Clauses

Does the fact that a risk can be insured (property insurance by theobligee, liability insurance by the obligor) affect the validity of a limitation orexemption clause?123 Can the validity of such a clause be justified by the factthat the risk was uninsurable by the obligor, or insurable by the obligee?

121 This example comes from PJ. Thys & M.H. Golub, Of). cit., p. 526.

122 Id., pp. 526-527, where the full text of this provision is quoted.

123 On this issue, see the remarkable comments byJ. Hellner, op. cit., pp. 44-48.


In England, the Unfair Contract Terms Act, Section 11 (4) (b), statesthat the reasonableness of a limitation clause can be inferred from the factthat the obligor has difficulties finding insurance. 124 The fact that a liability may be uninsurable can thus contribute to justifying the validity of anexemption or limitation clause.

On the other hand, some liability systems take very precise positionsconcerning the allocation of the risks among the contracting parties, andtheir solutions are imperative. This is the case with some internationaltransport agreements, such as the CMR. which provides that "a benefit ofinsurance in favor of the carrier ... shall be null and void" (Article 41,2°) .12!J Consequently, the carrier cannot exempt itself from its liability onthe grounds that the other party has insured the goods. Such a transfer ofbenefit of insurance would indeed modify the mandatory liability system. 12G

IV. CONCLUSIONS

Clauses excluding and limiting liability and warranty have certainly provided the Working Group with one of its richest themes, and the abovechapter did not nearly exhaust the subject.

Liability, being one of the risks of contracting, must be consideredwhen negotiating the allocation of such risks. Depending on the respectivepower of the parties, and on the contractual price, the harmful consequences of non-performance will be shared in various ways between theobligor in breach and the aggrieved obligee.

Exemption and limitation clauses are not, however, the only elementsregulating this allocation of risks. The law applicable to the contract hadalready achieved some allocation (e.g., by preventing the obligee fromrecovering indirect damages). Other clauses can also have an importantimpact on this problem, such as force majeure or liquidated damage clauses.

Drafting techniques of limitation and exemption clauses may varygreatly, as the above analysis demonstrates. Thus, special attention shouldbe paid to the problem of the validity of these clauses under the law applicable to the contract. Liability systems are closely linked to moral values, andlegal solutions are often mandatory.

124 Cf. Cheshire Fifoot & Furmston, op. cit., p. 196.

The clause quoted supra, pp. seems to have been inspired by this provision of theV.c.T.A.

12,j Cf. supra, pp. 388-389. For an example of such a clause, d. supra, pp. 394-395.

126 Cf. supra, pp. 388-389.

CHAPTER 8

FORCE MAJEURE CLAUSES ININTERNATIONAL CONTRACTS

I. INTRODUCTION

Obstacles outside the control of the parties may appear in the courseof performing international contracts. The goods to be delivered aredestroyed by fire or lost in a shipwreck. An armed conflict prevents the construction to continue. The export license is withdrawn by administrativemeasures.

Under such circumstances, is the obligor liable, or may he claim a causeof exoneration? What is to happen to its obligation? What happens to theother party's performance? What happens to the contract as a whole?

Each legal system takes a stand on these different questions, and theanswers are not identical. But practitioners engaged in international tradegenerally prefer to organize the consequences of such events themselves,through contractual provisions called force majeure clauses.

The concept of force majeure comes from Roman law, and it remains aclassical notion in certain romanistic legal systems such as French law.However, for-ce majeur/! clauses offer very original characteristics in the practice of international contracts. In relation to both the concept of force

majeure and the accommodation of its effects on contractual obligations,drafters of clauses have often been innovative in comparison to the solutions traditionally taught by romanistic lawyers. The study of these developments stemming from practice is of great importance for the purposesof refining legal theory. For practitioners, moreover, a critical analysis ofthe clauses collected for these discussions highlights the different aspectsof force majeure clauses that must be attentively considered during negotiations, with all their possible variations and the drafting traps to avoid.

Collecting a sample of force majeure clauses is not difficult; these clausesare common. The Working Group gathered over 150, among which 40 orso, selected beforehand on the basis of their interesting characteristics,were discussed in great detail.

Force majeure clauses can be drafted in a few lines. In complex contracts,on the other hand, they may become quite elaborate. One clause analyzed

401


by the Group covered 27 pages! When comparing recent clauses with earlier ones, the tendency is definitely towards more drafting sophistication.

An analytical description of the force majeure clauses collected (SectionII) will be followed by some critical considerations (Section III).l

II. PRACTICE

The following analysis is an attempt to draw up a picture of the principal elements generally present in force majeure clauses, with the numerousvariations, some of them better than others.

Like most contractual clauses, the force majeure clause consists of twoparts: first the hypothesis on which it rests is defined (Section II.A); theclause then describes the applicable regime (Section II.B).

A. Hypothesis

The hypothesis considered here is the force majeur/! event. However, thatconcept, arising from Roman law, is not found in all legal systems, andwhere it is accepted, it is inevitably interpreted in diverse ways. That is why,even when the concept of force majeur/! is recognized under the law of thecontract, drafters of clauses often feel the need to define it, or even toinclude in the definition a series of examples of this type of event. In manycases, they are attempting to characterize, contractually, a contingency thatdiverges, to a greater or lesser extent, from the criteria employed by theapplicable law, either by broadening the definition, or by including in thelist events that would not necessarily be categorized as force majeur/!. The

1 Force majeure clauses in international contracts have been the subject of severalother studies. Cf. Ph. Kahn, Force majeure et contrats internationaux de longue duree,JOUTn. Dr. Int., 1975, pp. 476-477; D. Lamethe, La clause de force majeure dans les contrats internationaux, ClE.G., January 1987, pp. 467-475; U. Draetta, R.B. Lake & v.P.Nanda, Breach and Adaptation ofInternational Contracts, Salem, 1992, pp. 85-99; P. Moisan,Technique contractuelle et gestion des risques dans les contrats internationaux: les casde force majeure et d'imprevision, 35 loes Cahiers de Droit, 1994, pp. 281-334; M.Furmston, Drafting of force majeure clauses-some general guidelines, in Fon;e rnajeLlrearuJ Frustration of Contract, E. McKendrick (ed.), L.L.P., 1995, pp. 57-62; A. Berg, Thedetailed drafting of a force majeure clause, id., pp. 63-120; U. Draetta, Force majeureclauses in international trade practice, Rev. Dr. Af! Int., 1996, pp. 547-559; M.Marmursztejn, Les clauses de force majeure dans les contrats de l'amont d'une societepetroliere: une etude de cas, I.B.L:J, 1998, pp. 781-806;J.M. Mousseron, Technique contractuelle, Paris, 2nd eel., 1999, No. 1390-1394; Chr. R. Seppala, FIDIC's New StandardForms of Contract: Risks, Force Mcyeure and Termination, I.B.LJ, 2000, pp. 1013-1025;U. Draetta, Les clauses de force majeure et de hardship dans les contrats internationaux,Dir: del Cornrn. Int., 2001, pp. 297-308, I.B.L:J, 2002, pp. 347-358; H. Konarski, ForceMajeure and Hardship Clauses in International Contractual Practice, I.B.L:J, 2003, pp.405-428.

Force Majeure Clauses • 403

variety of formulae is boundless; furthermore, the wording is often defective. Below we will attempt to describe the most interesting or the most representative examples from our collection.

1. Definitions

a. Classical Definitions

Classical definitions of force majeure appear in the following the clauses:

• "Force majeure are contingencies caused by neither of the partiesand which are unforeseeable at the time of concluding the Contract,uncontrollable and which render the further performance of thecontractual obligations impossible ..."

• "On entend par force majeure tous les evenements independantsde la volonte des parties, imprevisibles et inevitables, intervenusapres l'entree en vigueur du contrat et qui empechent l'executionintegrale ou partielle des obligations derivant de ce contrat."

Those two examples highlight the traditional criteria for force majeure,namely, unforeseeability, unavoidability, the fact that events are outside thecontrol of the parties and the effect of rendering performance of the obligation impossible.

b. Attenuation of Criteria

In general, however, clauses, which contain a definition of fora majeure,fail to include one or another of these criteria, or express them in a less rigorous Inanner.

Unforeseeability, for example, is not expressly required in the following clauses:

• "In the Contract "force majeure" shall mean any occurrence outside the control of the parties preventing or delaying their performance of the contract. ..."

• "En cas de survenance d'evenements independants de la volontedes parties et d'impossibilite d'execution totale ou partielle parune des parties engagees par la presente convention...."

• "... in case of force majeure or for any reason beyond its controlmaking it impossible for producer to manufacture or to deliver...."

Unavoidability is rarely omitted. Here, however, is such an example:

"The contracting parties are relieved of their obligations for partial or complete failure to comply with the contract liabilities withregard to the delivery terms if such failure is due to force majeure.


Force majeure regards all circumstances occurred after the signature of the contract and as a result of any event of exceptionalnature that could not have been anticipated by the contractingparties at the signature of the contract. ..."

Also, exceptionally, drafters forget to refer to the effect that the eventmust have on performance of the contract:

"On entend par force majeure pour l'execution du contrat tous lesevenements independants de la volonte des parties, imprevisiblesou, si previsibles, inevitables."

Such omissions may be inadvertent; some of them perhaps reflect thedesire to relax the classic conditions of force majeure. However, that desire ismore obvious in clauses that expressly set out the traditional criteriatogether with qualifications intended to temper their stringency.

Unavoidability is relaxed in the following clause:

"On entend par force majeure pour l'execution du contrat toutacte ou evenement imprevisible, irresistible, hors du controle desparties et qui ne pourra etre empeche par ces dernieres malgredes efforts raisonnablement possibles."

In other examples, reasonableness also extends to unforeseeability:

• "... tout evenement, circonstance ou etat de fait que Ie vendeurne pouvait raisonnablement ni prevoir, ni empecher et auquel illui a ete impossible de porter remede de maniere a pouvoirrespecter les delais contractuels de livraison."

• "Une partie n'est pas tenue pour responsable de la non-executionde l'une quekonque de ses obligations dans la mesure OU elleprouve:

• "que cette non-execution a ete due aun empechement independant de sa volonte;

• "... qu'elle ne pouvait pas raisonnablement etre tenue de prevoircet empechement et ses effets sur son aptitude aexecuter Ie contrat au moment de sa conclusion;

• "et qu'elle n'aurait pas pu raisonnablement eviter ou surmontercet empechement, ou a tout Ie moins, ses effets."2

2 Clause taken from the ICC Model Franchising Contract, Paris, ICC, 2000.


One clause refers to due diligence, possibly also allowing a more flexible interpretation of the criteria in question: 3

"By force majeure are to be meant extraordinary events independent of the Parties' will that cannot be foreseen or averted by themeven with due diligence, being beyond their control and preventing the Contracting Party / or Parties / to come up to his (their)obligation(s) undertaken in this Contract."

One criterion very commonly used to assess force majeure is to be foundin the expression beyond the control of the parties. Several of the clauses justcited include that expression, or a similar expression. It may be that thiscriterion comes under the classic conditions for unavoidability, or for anevent that is outside the will of the parties. Some consider nonetheless thatthe expression reflects the desire to relax the traditional requirements, ifonly by means of reference to the parties themselves (assessment in concreto). That desire is clear when the expression also refers to the term "reasonable": beyond the reasonable control of the parties.4

The attenuation of the requirements, however, usually refers to theimpact of force majeure events on the performance of contractual obligations. It is not always required that performance be absolutely impossible:

• "On entend par force majeure ... tout acte ou evenement imprevisible, irresistible et independant de la volonte des parties rendantmomentanement humainement impossible l'execution de leursobligations ou de certaines d'entre elles."

• "Sont consideres comme cas de force majeure ou assimiles, outreles cas communement admis par la jurisprudence beIge etfranc;aise ... [this is followed by a list of events]"... et en general, toutes les causes etrangeres ala volonte ou al'influence des contractants qui pourraient mettre obstacle a lamarche normale de l'approvisionnement, de la fabrication ou desexpeditions des contractants."

• "If either party is prevented from or delayed in carrying out any ofthe provisions of this Agreement by reason of ... [enumeration ofevents]"... or any cause beyond its control making it impossible or exorbitant from an industrial or commercial standpoint to perform its obligations hereunder...."

• "Force Majeure means any event beyond the reasonable control ofand without the fault or negligence of the party affected ... which

3 On the concept of "due diligence," d. SLI!JTCl, Chapter 4.



materially and adversely affects the performance by a Party of anyobligation hereunder, provided however...."

It should be noted that the latter clause differs in two respects fromclassic force majeure: it attenuates the requirement of impossibility of performance and leaves out the criterion of unforeseeability.

In other examples, unforeseeability is also left out, but it is the unavoidability that is less rigorously assessed here:

• "If either Sellers or Buyers are rendered unable wholly or in partby force majeure to carry out their obligations under thisAgreement. ..." [this is followed by the applicable regime].

• "The expression 'force majeure' shall mean circumstances whichwere beyond the control of the party concerned exercising the standard of care of a reasonable and prudent operator."

• "The expression 'force majeure' shall mean circumstances ...which were beyond the control of the party concerned and whichby the exer"Cise ofdue diligence and r-easonable foresight it could not haveprevented or overcome."

c. Reference to External Criteria

Sometimes, drafters of clauses do not include an original definition,but refer to sources of interpretation which are external to the contract.

• "The Sellers shall not be held responsible for late delivery or nondelivery of the goods owing to generally recognized jorce majeure' causes."

• "Outre les cas de force majeure admis par la jurisprudence, sont notamment consideres comme causes d'exoneration s'ils interviennentapres la conclusion du contrat et en empechent l'execution: ...[this is followed by an enumeration]"... lorsque ces autres circonstances sont independantes de lavolonte des parties."

The Working Group drew particular attention to the dangerouslyvague nature of those formulations, in particular in the first of the twoclauses. Although the law of the contract probably limits the discussion,one may well wonder by whom these causes of force majeure should be recognized. By the law? By the case law? By academics? Or did the partiesintend to refer to the lex mercatoria? The second clause is a little less imprecise, in that it refers expreSSly to the case law, and that certain criteria forinterpretation are provided in relation to the events listed after the generalformula; however this is still a far cry from model drafting.


There is a similarity between the second clause and the one alreadycited earlier which referred to cas communement admis par la jurisprudencebelge et franr;aise.

The sample we looked at included two clauses which relied on the parties themselves, or on arbitrators, to decide whether an event was one offorce majeure:

• "If either of the parties be prevented from performing its obligations under the contract by such cases of force m~eure as ... [thisis followed by an enumeration of events]"... or by other causes which can be recognized by both parties as being casesof force m~eure for being beyond their control. ..."

• "les cas de fore majeure sont ... [this is followed by an enumeration of events]"... ainsi que les autres cas adeterminer par l'arbitrage comme cas deforce majeure."

These formulations also appear very dangerous by reason of their lackof precision; they tend to be ambiguous. Unlike the first, the second clausedoes not even provide a single criterion for assessment.

The following clause, however, is interesting as it borrows in preciseterms its concept of force majeure from a national law:

"'Unabwendbare Gewalt' is a circumstance preventing the fulfilment of contractual obligations which at the time of conclusion ofthis Agreement, was unforeseeable and could not be preventedwith the diligence commonly required in international trade (asset forth in Article 293, paragraph 1 of the 'Gesetz uber internationaleWirtschaftsvertriige' ofFebruary 5, 1976, as published in the Gesetzblattder DDR, dated February, 10 1976)."

Though this law is no longer in force since the reunification of Germany, the model remains of interest. From the information available, theremainder of the contract was probably not subject to East German law(there was no express clause relating to the applicable law). Members ofthe Group however pointed out the dangers of deper;age. The grafting of adomestic regime governing force majeure onto a contract governed by a different legal system may cause problems of incompatibility. Insoluble difficulties may arise if the liability regime is subject to one legal system andthat governing clauses excusing performance is subject to another.


d. Lack of Definition

Other clauses, finally, do not provide any direct or indirect criterionfor the determination of the meaning to be given to the words "forcemajeure." The expression is used as such, with no further information:

• "S'il se produit des circonstances ou des evenements de forcemajeure et/ou de cas fortuit ..." [this is followed by a descriptionof the consequences].

• "Tous les cas de force majeure, qui peuvent se presenter pendantla duree du contrat, dechargent la partie etc."

• "Au cas OU Ie fournisseur prevoierait, pour cas de force majeure,une diminution de ses fournitures...."

The only option available to the person who is to interpret the contractis then to refer to the law of the contract. However, this supposes that thatlaw recognizes the concept of force majeure.

Sometimes, the absence of a definition is partially alleviated by havinga list giving examples of cases of fora majeure:

• "En cas de force majeure (incendie, inondation, tremblement deterre, epidemie et autres calamites) ...."

• "Par cas de force majeure s'entendent les cas comme guerre,incendie, explosion et fleaux de la nature tels que: inondation,tremblement de terre, etc."

Those two clauses appear to refer only to events of a catastrophicnature, which can give an indication to the person interpreting the contract. But they do not reveal anything as regards the characteristics thatthose events must have in order to constitute force majeure in the particularcase (unforeseeability, unavoidability, etc.).

2. Enumerations

We have just seen two examples of lists of circumstances that constituteforce majeure, in instances where those lists took the place of absent definitions. In general, however, a list, which was present in two-thirds of thecases in our sample, serves to illustrate the definition. We shall first try todraw up an overview of the circumstances most frequently found in the listsconsidered by the Working Group, before examining the possible relationship between definitions and lists.

a. Lists

(a) Natural disasters are the most frequently cited. It is rare to find a listthat does not cite at least one or the other of them. Here, are several examples taken from fora majeur/! clauses:


• " tremblement de terre, typhon, tempete, alluvions, incendies...."• " incendie, inondation, secheresse, glace...."• " force of nature, perils of navigation, shipwreck, ... , ... epi-

demics, ... landslides, lightning, earthquakes, fires, storms, tidalwaves, floods, washouts, ... freezing of lines...."

The list sometimes ends with a general formula:

• " earthquake, flood, fire or other natural disaster."• " incendie, inondation, tremblement de terre, epidemie et

autres calamites...."

The general formula may also come first:

"... les calamites naturelles ou les autres evenements tels que:tremblement de terre, typhon, tempete, inondations, alluvions,incendies, etc."

Other clauses simply use a general formula to cover natural disasters:

• "... any operation of the forces of nature...."• "cataclysmes...."

The English expression Act of God is often used for the same purpose;in contracts formerly concluded with socialist countries, the expression "ActofElements" was sometimes used instead.

(b) Armed conflicts make up the second category of events most frequently found in lists. Here also, clauses differ according to whether or notthey use general formulae, and according to whether or not they attemptto cover the greatest number of possible cases:

• "Disasters, such as ... war."• " operations militaires de tous genres...."• " acts of war, ... revolutions and the like."• " la guerre (declaree ou non), la rebellion, la revolution, la

commotion civile...."• "... war, preparation for war, blockade, revolution, insurrection,

mobilisation, civil commotions, riots...."• "... war, hostilities (whether war be declared or not), invasion, act

of foreign enemies, rebellion, revolution, insurrection or militaryor usurped power, civil war, or (otherwise than among the Contractor's own employees) riots, commotion or disorder...."

(c) Industrial disputes do not feature in alllists. 5 When such disputes areaccepted as possible instances of force majeur-e, they are often referred to in

" Considering industrial disputes as force nwjeure cases used to be an importantsource of controversy in East-West trade.


rather vague terms, by including the words greve, strike, or alternatively lockout or go-slow in the list. However, here are some more explicit turns ofphrase which were found in the sample examined by the Working Group:

• "... strike or lockout or other industrial action...."• "la greve, ... les troubles du travail. ..."• "... strike, lockout, differences with workmen...."

Certain clauses cover industrial disputes within the enterprise itself, oreven within its sub-contractors:

• "... labor trouble from whatever cause arising and whether or notthe demands of the employees involved are reasonable and withinsaid party's power to concede...."

• "greves generales, greves organisees syndicalement dans l'entreprise du vendeur et dans les entreprises de ses sous-traitants...."

The last example appears to exclude so-called wildcat strikes.

In other instances, on the contrary, the clause restricts the notion offorce majeure to industrial disputes outside the firm:

• " national, regional, city-wide or industry-wide strikes...."• " strikes, works to rule or go-slows that extend beyond the

Complex, are widespread or nationwide, or that are of a politicalnature, such as, by way of example and not limitation, labouractions associated with or directed against a Country political party,or those that are directed against the Company (or its Contractors)as part of a broader pattern of labour actions against companies orfacilities with foreign ownership or management. ..."

• "Labour disputes involving Company's personnel and or engineer's personnel shall not be considered as force majeure. Onlyother (external) strikes affecting directly the ability of theparty(ies) to perform its (their) obligations under this Agreementshall be accepted as force majeure."

None of the clauses considered included any reference to some of theforms of industrial dispute which have developed in recent years, such asthe occupation of factories.

(d) Among the events most frequently found in lists of instances offorce majeure are the breakdown of machinery and similar accidents:

• " bris ou mise hors service de machines...."• " accident to plant. ..."


• explosions, breakage or accident to machinery, oil or gaspipelines...."

• "... les accidents d'exploitation generalement quelconques...."

(e) Transport difficulties and/or procurement difficulties also pre-occupy thedrafters of many clauses:

• "... impossibility of the use of railway, port, airport, river transport,roads...."

• " Inanque de wagons ou tonnage...."• " delays of carriers...."• " interruption or delay of transport facilities...."• " grave crises de ravitaillement ou matieres premieres indis-

pensables ala production...."• "... complete or partial shutdown of plant by reason of inability to

obtain sufficient raw materials or power...."• " shortage of labour, ... power or fuel shortage...."• " lack or failure of supplies of power, raw materials and labour "• " disturbance in supplies from normally reliable sources "

(f) Fait du prince, that is to sayan obstacle to performance of contractual obligations resulting from the intervention of public authorities, maytake different forms:

• " interdiction d'exportation ou importation...."• " inability to obtain necessary construction or exploitation

permits...."• "... interdiction de transfert de devises, ... restrictions d'emploi

d'energie...."

It may be deemed preferable to use more general expressions:

• " governmental order or regulation...."• " acts of Government or any governmental authority or repre-

sentative thereof (whether or not legally valid) ...."• "... any legislative, judicial or governmental action...."

The special case of change of legislation is more and more often considered in recent contracts. Very elaborate clauses can cover situations whensuch modification of the law would render performance impossible-ormore onerous.

Here is an example:

"A 'Change in Law' means:


"(a) the adoption, promulgation, modification, repeal or re-interpretation after the effective Date by any Governmental Entity ofany Law of (country), including, without limitation, a decision of aGovernmental Entity after the Effective Date, which (or the effectsof which) amends or conflicts with the Laws of (country) established or in effect as of the Effective Date, or

"(b) the imposition after the Effective Date by a GovernmentalEntity of any term or condition in connection with the issuance,renewal, extension, replacement or modification of any Consent,

"that in either case contributes to a Change in Costs, requires aStatutory Modification, renders the Financing Documents unlawful, unenforcable, invalid or void or establishes requirements for,or imposes restrictions on the construction, operation, maintenance, financing, insurance or ownership of the Complex or theCompany, or the prices payable under the Agreement, that aremore restrictive or more onerous than the most restrictive or mostonerous requirements (i) in effect as of the Effective Date, (ii)specified in any applications, or other documents filed in connection with such applications, for any Consent filed by the Companyon or before the Commercial Operations Date, so long as suchrequirements are consistent with the Laws of (country) in effect asof the Effective Date or (iii) agreed to by the Company in anyagreement in the Security Package."

Such provisions are to be compared to the so-called stabilizationclauses, through which parties agree that the law applicable to the contractwill be that of a certain country, as it stood when the contract was executed.This attempt to freeze a legal system by neutralizing its later developmentscan raise several problems, especially if one of the contracting parties ispart of the state authority involved. 6 It may be more efficient to cope withthe problem of legislative change in the force majeure clause and to organizethe effects of the event on the contract. The benefit of such a clause cannot, of course, be extended to the contracting State.7

6 On these clauses, cf., Ph. Weil, Les clauses de stabilisation ou d'intangibiliteinserees dans les accords de developpement economique, Melanges Ch. Rousseau, 1974,pp. 301-328; N. David, Les clauses de stabilite dans les contrats petroliers. Questionsd'un praticien,journ. Dr; Int., 1988, pp. 79-107; S.H. Chatterjee, The Stabilisation ClauseMyth in Investment Agreements, J01un. oj Int. Arb., 1988, pp. 97-112; W. Peter, Lesclauses de stabilisation dans les contrats d'Etat, l.B.L], 1998, pp. 875-891.Cf. also ICCaward No. 3380, rendered on November 29, 1980, in S.Jarvin & Y Derains, Recueil dessentences arbitrales de la G.G.l., 1975-1985, Kluwer, 1990, pp. 96-100.

7 On the combination of those two clauses when they coexist, see M. Marmursztejn,Of). cil., pp. 787-789.


The following clause contains a more general reference to materialadverse governmental action:

"For purposes of this Clause 18.4 and Clauses 18.1.2 and 23.4.2, amaterial adverse governmental action shall occur if

"(i) the Government or any Relevant Authority takes action of anynature whatsoever, including the introduction or application ofany law, decree or regulation, whether prior to or after the Date ofthe Concession Contract, or fails to carry out its obligations as prescribed by law, the principal effect of which is directly or indirectlyborne by the Concession Company or by the Concession Companyand other toll road concessionaires and only incidentally by otherPersons or

"(ii) the Government or any Relevant Authority takes or omits totake any action of any nature whatsoever, which, if such action hadbeen taken or omitted by the Ministry, would have constituted amaterial breach of the Concession Contract by the Ministry (itbeing understood that an increase in taxes of general applicationwhich does not discriminate against the Concession Company orthe Concession Company and other toll concessionaires, shall notbe deemed a material breach of Clause 7.1.1 of the ConcessionContract) and, in the case of either sub-clause (i) or sub-clause (ii),such action, failure or omission, as the case may be, materiallyadversely affects the economic position of the Concession Company, except under circumstances where such action or omissionis in response to any act or omission on the part of the ConcessionCompany which is illegal (other than an act or omission renderedillegal by virtue of such action by the Government or Relevantauthority) or in violation of agreements to which the ConcessionCompany is a party."

It will immediately be noticed that these clauses cover cases of impossibility of performance and cost increase at the same time, thus coveringboth force majeure and hardship situations.S

b. Combination With the Definition

In most cases, the events featured in the lists serve as illustrations of themeaning of force majeure as previously mentioned or defined. What, moreprecisely, is the relationship between the two?

S Cf. infra, pp. 443-445.


First of all, lists are, in principle, stating examples. They are almostalways introduced by an expression such as "in particular" or "for example,"and/or are followed by "etc." or by an expression such as "or other similar circumstances." Here is a typical illustration:

"Force majeure are contingencies caused by neither of the partiesand which are unforeseeable at the time of concluding the Contract, uncontrollable and which render the further performanceof the contractual obligations impossible as for instance acts ofGod, acts of war, acts of Government, blockages and revolutionsand the like."

In very rare cases, the list appears limiting:

"Special and excepted risks are: war, hostilities, ... , any operationof the forces of nature as reasonable foresight and ability on thepart of the Contractor could not foresee or reasonably provideagainst."

Furthermore, we have already cited certain clauses where the exampleslisted appeared to limit the instances of force majeure to certain types of disaster. Here is one such clause:

"En cas de force m~eure (incendies, inondations, tremblement deterre, epidemie et autres calamites) ...."

The major problem in the relationship between the concept of force

majeure and the list of instances is, however, knowing whether the circumstances considered always constitute cases of for-ce majeur-e or only do sowhen they have the general characteristics of the notion. The events inquestion may in fact only be illustrations; but they can also appear in thelists because the parties wanted them to be considered as cases of force

majeure, although not meeting the conditions for force majeure. Therefore,ambiguous drafting runs the risk of raising serious problems of interpretation. Consider the following clause:

"By force majeure are to be meant extraordinary events independent of the Parties' will that cannot be foreseen or averted by themeven with due diligence, being beyond their control preventingthe Contracting Party or Parties to come up to his / their / obligation(s) undertaken in this Contract. Disasters, such as inundations, earthquake, stroke of lightning and war are to be consideredas such events."

Are all inundations and all wars necessarily to be considered instancesof force majeure as regards performance of the contract? Or are they simply


instances of force majeure if they fulfill the conditions set out in the first sentence of that clause? There are inundations that are foreseeable and thereare wars that do not render performance of the contract impossible.

If the parties only intend to allow the events cited if they fulfill the general criteria, the drafting must be more precise on that point.

In the following clause, the words selon le cas appear to render theinstances listed subject to the conditions in the preceding sentence:

"Aucune des Parties ne sera responsable de la non-execution desobligations qu'elle assume par Ie present Contrat, s'il se presentedes circonstances de Force majeure et/ou de Cas fortuit, c'est-adire n'importe que! evenement ou circonstance independant et endehors du contrOle des Parties. On considerera Force majeure ouCas fortuit, selon le cas, entre autres, la guerre (declaree ou non),la rebellion ..." [remainder of the list] .

That wording creates doubt, however. It is preferable to use moreexplicit expressions, such as the following:

• "... sont notamment consideres comme causes d'exoneration s'ilsinterviennent apres la conclusion du contrat et en empechent l'execution:les conflits du travail et toutes autres circonstances telles queincendie, mobilisation ... [remainder of the list], "lorsque ces autrescirconstances sont independantes de la volonte des parties."

• "The expression "force majeure" shall mean circumstances whichwere beyond the control of the party concerned exercising thestandard of care of a reasonable and prudent operator. Subject tothe for-egoing and without limiting the generality of the foregoingthe following circumstances in particular shall be regarded as forcemajeure: forces of nature, perils of navigation, ... [remainder ofthe list], "or any other cause whether of the kind herein enumerated or otherwise which is beyond the control of the party concerned exercising the standard of care of a reasonable and prudent operator."

• "(a) The expression "force majeure" shall mean circumstances(whether of the kind mentioned in subclause (b) of this Clause orotherwise) which were beyond the control of the party concernedand which by the exercise of due diligence and reasonable foresight it could not prevent or overcome."(b) The circumstances which shall (provided they fulfil the requirements ofsubclause (a) of this clause) be within the definition of Forcemajeure shall include but shall not be limited to the following: actsof God or forces of nature...."

• "Force Majeure may include, but is not limited to, exceptional


events or circumstances of the kind listed below, so long as conditions (a) to (d) above are satisfied...."9

• "Force Majeure Events hereunder shall include each of the following events and circumstances, but only to the extent that eachsatisfies the above requirements."

c. Exclusions

Certain clauses take care to list events which, in principle, do not belongto force majeure:

• "Force Majeure Events shall expressly not include the followingconditions, except and to the extent that they result directly froma Force Majeure Event:"(i) except as provided in Section 17.1 (c) (i) (E), late delivery ofmachinery, equipment, materials spare parts or consumables(including fuel) for the Project;"(ii) a delay in the performance of any of the Contractors; or"(iii) normal wear and tear or random flaws in materials andequipment or breakdowns in equipment."

• "Pour l'application du paragraphe 1 ci-dessus, et sauf stipulationcontraire dans Ie contrat, les empechements ne comprennent pasl'absence d'autorisation, de licence, de visa d'entree ou d'autorisation de sejour, ou d'approbations necessaires a l'execution ducontrat et devant etre deIivree par une autorite publique quelconque du pays de la partie qui demande l'exoneration de saresponsabilite. "10

Particularly elaborate contracts even come to distinguish among suchexceptions, those that concern each party respectively:

"16.1.2. Exceptions Applicable to the Company"The Company shall not have the right to consider any of the following circumstances to be an event of Force Majeure that wouldsuspend the performance or excuse the non-performance of itsobligations under this Agreement:

" (a) any delay:

9 FIDIC Conditions of Contract for Construction, 1999, Art. 19.1; d. Chr. R.Seppala, op. cit., pp. 1019-1021.

10 Clause quoted from the ICC Model International Franchising Contract, Paris,ICC, 2000.


"(i) in performance by any contractor or subcontractor of theCompany, including the Construction Contractor ... or any director indirect subcontractor to either of them; or

"(ii) in the delivery of equipment and machinery for the ProjectFacilities;

"except to the extent that such delay is itself caused by an eventwhich satisfies the criteria set out in Article 16.1.1 in relation toboth the Company and the relevant contractor or subcontractor;

"(b) any patent or latent defects in any materials, equipment,machinery and spare parts for the Project Facilities; or

"(c) breakdown or ordinary wear and tear of materials, equiment,machinery or parts of the project Facilities.

"16.1.3. Exceptions Applicable to the Government

• "The Governement shall not have the right to consider any of thefollowing circumstances to be an event of Force majeure thatwould suspend the performance or excuse the non-performanceof its obligations under this Agreement:

"(a) the expropriation, requisition, confiscation or nationalizationof the Project facilities or any part thereof by a GovernmentAuthority;

"(b) the imposition of any blockade, import restrictions, rationingor allocation by a Government Authority;

"(c) insufficiency of the supply of raw water available to theCompany in accordance with Article 10.1.2, except where and tothe extent that such circumstances are caused by event describedin Article 16.1.1(a);

"(d) non-compliance of the supply of raw water available to theCompany with the Raw Water Quality in accordance with Article10.4, except where and to the extent that such circumstances arecaused by an event described in Article 16.1.1 (a) or (b);

"(e) interruption in the supply of electricity to the projectFacilities, except where and to the extent that such circumstancesare caused by an event described in Article 16.1.1 (a);


"(f) act of war (whether declared or undeclared), invasion, armedconflict or act of foreign enemy, riot, terrorism or exercise of military power that occurs inside the (Country); or

"(g) national, regional, city-wide or industry-wide strike ."

It will have been noticed that exclusions relating to fait du prince appearin the list applicable to governmental authorities.

B. Regime

When an event constituting force majeure has occurred, the clausedescribes the regime that applies to it. The first step is to notify the othercontracting party that fora majeur-e has arisen and to provide that party withproof. The clause then specifies the effects on the obligations of the parties: release from any liability, suspension of the obligation of performance.New obligations may then arise to use every possible means to remedy theimpossibility of performance as soon as possible, and to notifY the otherparty of the end of a situation of force majeure. If the situation carries onbeyond a certain time limit, the contract may stipulate that the contract isto be re-negotiated or terminated. The specific case of obligations to paymoney due will be discussed at the end.

1. Notice, Evidence

The occurrence of an event constituting force majeure has importanteffects on performance of the contract. It is therefore important for theother contracting party to be rapidly notified, and for the necessary proofto be submitted. However, many clauses covering force majeure fail to consider these aspects, and leave their solution to general principles, or evento ad hoc inspiration. It would seem preferable to avoid these uncertaintiesby deciding in advance the detailed procedure for notice and evidence.Here, in that connection, is what emerged from the analysis of clauseswhich pursued this course.

a. Notification

The notice requirement, when it is provided for, is generally coupledwith conditions for form and time limits.

As regards form, it is sometimes merely required that notice be express:

"La partie qui invoque un cas de force majeure devra aussitotadresser une notification expresse al'autre partie."

More often, written notice is required:


"Upon the occurrence of any such contingencies the party suffering therefrom shall immediately give the other party notice in writing of the cause of delay...."

Occasionally, notice is to be given by registered letter or by an accelerated means of communication (formerly cable, telex or telegram, nowadays facsimile or electronic mail), or even by a combination of two of thesemethods:

• "La partie qui invoque Ie cas de force majeure devra, aussitot apresla survenance, adresser une notification expresse et Tf:commandfie al'autre partie."

• "The concerned party has to notify the other party of setting in ofthe events mentioned in §17.0 immediately by cable and confirm itby a registered mail letter."

• "... la partie affectee par Ie cas de Force majeure informe(ra)l'autre par ecrit dans un delai d'au moins ... jours, et si cela estnecessaire par telex ou telecopie, de la survenance de l'eveneInent. ... "11

Another option is notice by telephone to be confirmed in writing:

"The party claiming force m~eure shall notify the other party of saidforce majeure event promptly after the occurrence thereof by tele

phonewhich shall be confirmed by telex or telegram as soon as possible."

More recent versions of such clauses would of course refer to e-mailand fax.

Notice must, of course, be given as soon as possible. As we have seen inseveral of the examples cited, many clauses merely lay down the requirement that notice be given "as soon as possible" or "immediately." Sometimes, however, they provide a specific time limit; in the sample of clausesthat were submitted to the Group, there were time limits of seven, 15, 21and 30 days. In another example, notice was to be given "within a reasonable time."

The clause may cover the case when the possibility to give immediatenotice is itself hindered by the force majeure event:

"If the Force Majeure Event results in a breakdown of communications rendering it reasonably impracticable to give notice within

11 Clause quoted from the ICC Model International Franchising Contract, Paris,ICC, 2000.


such period, then the Party affected by the Force Majeure Eventshall give such notice as soon as reasonably practicable after thereinstatement of communications, but not later than 24 hoursafter such reinstatement."

A time limit only makes sense if its starling point is known. Those drawing up clauses are not always aware of this. When they are, the time limitusually starts to run from the occurrence of the event; a better solution forthe person under the obligation is provided in the following clause:

"Le vendeur notifiera al'acheteur l'existence d'un tel cas, dans lestrente jours de son apparition, ou de la date it laquelle il est venu it saconnaissance."

Some clauses provide for notification in two stages, possibly followedby further notices:

"If by reason of a Force Majeure Event a Party is wholly or partiallyunable to carry out its obligations under this Agreement, theaffected Party shall

"(i) give the other Party notice of the Force Majeure Event(s) assoon as practicable, but in any event, not later than the later offorty-eight (48) hours after the affected Party becomes aware of theoccurrence of the Force Majeure Event(s) or six (6) hours afterthe resumption of any means of providing notice between theCompany and the GOVERNMENT, and

"(ii) give the other Party a second notice, describing the ForceMajeure Event(s) in reasonable detail and, to the extent that canbe reasonably determined at the time of the second notice, providing a preliminary evaluation of the obligations affected, a preliminary estimate of the period of time that the affected Party willbe unable to perform the obligations, and other relevant mattersas soon as practicable, but in any event, not later than seven (7)days after the initial notice of the occurrence of the Force MajeureEvent(s) is given by the affected Party.

"When appropriate or when reasonably requested to do so by theother Party, the affected Party shall provide further notices to theother Party more fully describing the Force Majeure Event(s) andits cause(s) and providing or updating information relating to theefforts of the affected Party to avoid and/or to mitigate theeffect(s) thereof and estimates, to the extent practicable, of thetime that the affected Party reasonably expects it will be unable to


carry out any of its affected obligations due to the Force MajeureEvent(s)."

This gives the other party the most complete information, not only onthe occurrence of the event but also on its effects on the contract.

b. Evidence

The party invoking force majeure must provide evidence of it. This isdoubtless the case under the ordinary law, but certain clauses providedetailed rules governing evidence.

Sometimes, the notice discussed above must be given together with thenecessary proof:

"Cette notification devra etre accompagnee de toutes les informations circonstanciees utiles...."

More often, since notice must be given rapidly and gathering the evidence may take a certain time, evidence may be supplied later, if necessarywithin a new time limit:

• "Apres cette notification seront envoyees toutes les informationscirconstanciees...."

• "Les preuves officielles du cas signale seront ... fournies dans les30 jours a compter de la date de notification du cas de "forcemajeure," en meme temps qu'une indication sommaire des consequences possibles sur les conditions de livraison."

What constitutes proof? Some of the preceding examples merely requireinformations circonstanciees (detailed information). The last clause refers topreuves officielles. In other cases, trustworthy documents are required, or certificates from the competent authorities:

"Les cas de force majeure ... ne peuvent etre opposes a l'autrepartie qu'a condition de lui avoir communique, dans un delai de21 jours de leur apparition, par lettre recommandee, Ie commencement et la fin de la force majeure invoquee, en annexant acette communication un certificat des autorites competentes attestant larealite et l'exactitude des faits et dates allegues."

What are these competent authorities? It could be, for example, themeteorological institute (in case of storm), the railway company (in case ofrailway accident) or the police (in case of theft).

The competent authority may be an international institution:


"The following prevailing conditions between Effective Date andFinancial Close, as supported by appropriate written evidence,shall constitute a Financial Market Disruption:

"(1) International Finance Corporation (IFC) certifying to Government that IFC are ceasing or will not lend funds to the Projectbased upon a reasonable assessment of the risk of lending into theAAMB Country generally; or

"(2) IFC certifying to Government that IFC has insufficient fundsto finance the Project due to a disruption in the internationalfinance markets."

Parties may also accept evidence given by an independent third party:

"The Party so affected shall arrange for the occurrence of theevent to be certified to the other Party by the IndependentEngineer or some other mutually acceptable third party."

In contracts concluded with socialist countries, Chambers of Commerce

used to be given a prominent role:

• "At the party's request the party suffering the force majeure eventis obliged to make the Chamber of Commerce of his country testify the event."

• "La confirmation de l'annonce est a. ratifier par la Chambre localede l'industrie et du commerce et par Ie Conseiller commercial dela R.P. de Pologne a. Bruxelles."12

C. Remedies

What should be the remedies for failing to meet the requirements to givenotice and evidence of force majeure?

A first option is to make the person under the obligation responsiblefor making good the damage resulting from the lateness in performing therequired formalities. Here is an example:

"Vous devez nous signaler toutes les causes de retard des qu'ellesappairaitront, de maniere que nous puissions prendre toutes dispositions utiles, en particulier vis-a.-vis des clients, faute de quoi

12 Note in that last clause the additional intervention of a diplomat from the country of the other contracting party. The role thus given to Chambers of Commerce usedto raise certain questions: d. the first French edition of this book, Droil des r;onlrals inler~

nationaux, Paris, 1989, p. 244.


vous serez tenus pour responsables des prejudices qui en resulteraient pour notre societe."

Occasionally, the party under the obligation may invoke the suspensionof his obligations only as from when he gave notice:

• "Tout cas de force majeure ou assimile ... suspend l'execution dela presente convention apartir du moment mIla partie inter-essee a informe l'autre "

• "Failure by the affected Party to give notice of a Force MajeureEvent to the other Party within the forty-eight (48) hour period orsix (6) hour period required by Section 17.2(a) shall not preventthe affected Party from giving such notice at a later time; provided,however, that in such case, the affected Party shall not be excusedpursuant to Section 17.4 for any failure or delay in complying withits obligations under or pursuant to this Agreement until thenotice required by Section 17.2 (a) (i) has been given."

More often, a more radical sanction is stipulated: lateness in complying with formalities entails the loss of the right to invoke the clause excusing performance:

• "Tout retard pour cas de force majeure, non notifie dans les conditions et formes ci-dessus, ne sera en aucune fac;on retenu pourIe decompte du delai contractuel."

• "A defaut de notifier les cas ou de fournir les preuves dans lesdelais impartis, Ie droit du vendeur de demander une prolongation de delai est frappe de prescription pour ce cas considere."

• "La partie qui n'a pas respecte cette condition sera reputee avoirpris a charge irrevocablement les risques et toutes les consequences de la force majeure respective."

• "Si la partie contractante se derobe ason obligation d'informerl'autre partie par telex, elle ne pourra plus invoquer Ie cas de forcemajeure."

What remedy is to be applied in the many cases where the clause hasmade no provision? Most of the members of the Group considered that itshould be the loss of the right to invoke the force majeure clause. Others consider that sanction to be too severe, given the difficulty for the party underthe obligation to assess from the outset whether a given incident will constitute an obstacle of force majeure with regard to the performance of itsobligations (the length of a strike, for example, is not always foreseeable atthe start). Should it then give notice of it? Should it suffer such a severesanction for not having done so immediately? There was general agreement, in any event that the obligor will not suffer a penalty if the lateness


in giving notice is due to the force majeure itself (for example an interruption in communications), a hypothesis that certain clauses explicitly cover. 13

2. Exemption From Liability

The occurrence of a fora majeur/! event will, at least temporarily, prevent performance of certain obligations arising from the contract, underconditions that exclude any liability on the part of the obligor. The effectof force majeur/! of excusing performance is self-evident as far as the draftersof most of the clauses were concerned, since they do not mention it explicitly. However, here are a few examples where that point is stressed:

• "The Contractor shall not be responsible for any harm or damagesthat are due to force majeure...."

• "Neither party shall be deemed to be in default of its contractualobligations whilst performance thereof is prevented by forcemajeure...."

• "No indemnity shall be claimed by either party in case of forcemajeure."

• "Pour les retards et non-execution des obligations due a la forcemajeure, aucune partie ne peut reclamer a l'autre des penalites,des interE~ts ou tout autre dedommagement ou participation auprejudice souffert par elle acause de la force majeure."

Certain clauses make it clear that force majeure cannot exempt from liability non-performance resulting from other causes that may be imputableto the obligor:

• "Provided, however, that no relief, including without limitation,the extension of performance deadlines, shall be granted to theaffected Party pursuant to this Section 17.4 to the extent that suchfailure or delay would have nevertheless been experienced by theaffected Party had the Force Majeure Event not occurred."

• "... except under circumstances where such governmental actionor omission is in response to any act or omission on the part of theConcession Company which is illegal (other than an act or omission rendered illegal by virtue of such action by the Governmentor Relevant authority) or in violation of agreements to which theConcession Company is a party."

3. Suspension of Performance

Whereas the classical theory, built around simple contracts, where performance is instantaneous, emphasizes the extinguishing effect of force

13 Cf. supra, pp. 419-420.


majeure (the obligation is extinguished), the practice in international contracts shows that initially, at least, force majeure only has a suspensive effect.

Suspension may, however, be dealt with in several ways.

a. Extending the Duration of the Contract

The first method, most commonly found, has the effect of extending thetime limits for performance equal to the time during which performance is suspended:

"... les obligations affectees par la force majeure sont prorogeesautomatiquement d'une duree egale au retard entraine par la survenance du cas de force majeure."

While a formula is frequently found, occasionally the prolongation isnot necessarily of the same duration as the period of suspension:

• "... les delais de livraison seront prolonges d'une duree raisonnable tenant compte des circonstances."

• "Au cas OU la partie empechee par un cas de force majeureestimerait que l'incidence sur les delais est superieure ala dureememe du cas de force majeure, elle se rapprocherait de l'autrepartie pour arreter, en commun, la duree du retard."

• "... the delivery periods shall be increased as far as necessary tocompensate the reduction in deliveries caused by force majeure."

b. Suspension Without Extension

Another possibility is to suspend performance but not to prolong the duration of the contract, which is therefore irremediably reduced by part of itsduration, and, in certain cases, part of performance is cancelled:

• "... the party so prevented or delayed shall be excused from suchperformance to the extent and during the period of prevention ordelay, without, however, extending the term of this Agreement."

• "Pendant la duree de la force majeure, Ie present contrat suspendera ses effets jusqu'au retablissement normal de la situation,la duree des presentes n'etant en aucun cas prolongee des periodes de suspension eventuelles et les quantites non livrees etantpurement et simplement annulees."

• "Any quantity of ... which is not shipped from port of loading ... due to suspension of this Agreement shall be cancelled from thisAgreement unless otherwise agreed within 15 days of the date ofthe declaration of force majeure hereunder."

It is important to specify whether or not suspension of the contractprolongs time limits. Clauses that do not clarifY this matter can lead to obvious problems of interpretation.


c. Procurement Contracts

In procurement contracts, suspension in the supplies clearly risks placingthe other contracting party in a difficult position.

Is the buyer provisionally entitled to obtain supplies elsewhere? That isexpressly provided for in one clause:

"Buyers shall be at liberty to procure from other suppliers any deficiency of deliveries caused by the operation of this clause."

But that option is implicitly excluded in another contract:

"The orders corresponding to the suspended deliveries shallaccordingly be cancelled, this Agreement remaining in force."

The final words refer, inter alia, to the obligation of exclusivity.

Moreover, it is possible that the seller has several clients, and that theforce majeure event only has the effect of reducing supplies. Several clausesanticipated that situation and provided for proportional allocation:

• "If, by a reason of any such contingencies, seller is unable to supply the total demands upon it for the material or materials coveredby this Agreement, seller, without liability, may allocate its availablesupply pro rata among its contract customers and for its manufacturing purposes."

• "In case the Party affected by Force Majeure is Seller, Seller shallfairly allocate product produced by it in Antwerp proportionallyamong its own requirements and these of its long term customerunder running sales contracts, inclusive of Buyer."

• "If, owing to any event of Force Majeure as described hereinabove,Company X was driven to reduce its supplies of ... , Company Xshall make sure that the reduction of these supplies will not be proportionally bigger than the one applied to other purchasers of thesame supplies."

These three examples offer interesting variations. The supplier maywant to secure his own needs, but each client will not necessarily receivethe same allocation.

d. Unilateral Clauses

The suspension of the obligations affected by force majeure results mostoften from the automatic application of the contractual clause. Sometimes,however, it is left to the discretion of the other contracting party:


"Des prolongations de delais d'execution pourront etre accordees parl'acheteur au vendeur dans Ie cas OU celui-ci serait empeche ouretarde dans l'execution du contrat par suite d'un cas de forcemajeure...."

Conversely, some clauses leave the party under an obligation great latitude:

"... nous nous reservons Ie droit de suspendre, de limiter ou d'ajourner partiellement ou totalement nos livraisons ou bien derenoncer a la partie non executee du contrat sans aucune obligation de dedommagement."

e. Costs Incurred by the Parties

What of the expenses resulting from the suspension for the party underobligation who invokes force majeure? Costs may be considerable: warehousing expenses for supplies whose delivery has been prevented, expenses oftemporarily keeping personnel on the spot, etc. Those expenses are linkedto the obligation to use all possible means to ensure that performance ofthe contract resumes as soon as possible. 14

On the other hand, the suspension may also cause prejudice to theother party. In principle, the exculpatory effect of force majeure exempts theobligor from any obligation to indemnify, but such consequences alsodeserve attention.

The clauses examined are often silent on these points.

Sometimes, the general nature of the clause relating to the effect forcemajeur-e has of excusing performance, while denying any right to compensation for either of the parties, leads to the conclusion that both parties areto bear their respective expenses:

"Pour les retards et non-execution des obligations dus a la forcemajeure, aucune partie ne peut reclamer al'autre des penalites,des interets ou tout autre dedommagement ou participation auprejudice souffert par elle acause de la force majeure."

There seems to be an evolution towards a better understanding of thepotential seriousness of the effects of force majeur-e during the period of suspension. This appears in the following clauses, which deal with the problem of costs linked to the extension of time limits:

14 Cf. infra point 4.


• "S'il se produit des circonstances ou des evenements de forcemajeure et/ou de cas fortuit, chacune des parties pourra suspendretout ou partie de l'ouvrage ou de ses obligations contractuelles ..."Dans cette eventualite, la periode de suspension et la determination du cmIt, des pertes et/ou des dommages qui pourraientdecouler de cet evenement, seront decidees moyennant des negociations directes et amiables entre les parties...."

• "If the Contractor is prevented from performing any of his obligations under the Contract by Force Majeure of which notice hasbeen given under Sub-Clause 19.2 (Notice of Force Majeure), andsuffers delay and/or incurs Cost by reason of such Force Majeure,the Contractor shall be entitled subject to Sub-Clause 20.1(Contractor's Claims) to:"(a) an extension of time for any such delay, if completion is or willbe delayed, under Sub-Clause 8.4 (Extension of Time for Completion), and"(b) if the event or circumstance is of the kind described in subparagraphs (i) to (iv) of Sub-Clause 19.1 (Definition of ForceMajeure) and, in the case of sub-paragraphs (ii) to (iv), occurs inthe Country, payment of any such COSt."15

Certain recent contracts deal with the problem of costs in a very elaborate manner. In a contract concerning investments in a Northern Mricancountry, the Group has found an extensive clause (15 pages), entirelydevoted to the arrangement of the financial consequences of force majeure.

This clause provided for payment of compensation, fully describing modesof evaluation.

4. Efforts to Overcome the Obstacle of Force Majeure

With the proviso of the relaxations described above, an event of force

majeure is, in principle, unforeseeable and unavoidable when it occurs.However, once the event has occurred, it is often possible to act in such away as to re-establish the conditions enabling performance of the contractto be resumed. Many force majeur-e clauses make this an express obligation:

"Dans tous les cas, la partie concernee devra prendre toutes dispositions utiles pour assurer dans les plus brefs delais, la reprisenormale de l'execution des obligations affectees par Ie cas de forcemajeure et reduire au maximum Ie retard subi."

It is sometimes provided that the other contracting party is to be keptinformed of the measures taken to that effect:

15 FIDIC Conditions of Contract for Construction, 1999, Art. 19.4; cf. Chr. R.Seppala, Of}. r;il., pp. 1019-1021.


"... (la partie affectee par la circonstance de force majeure) prendra les mesures necessaires et realisera les efforts correspondantaux circonstances pour dominer cette situation, en donnant avisofficiel de ses actions al'autre partie aux fins pertinentes."

Often, the obligation is placed on both parties:

• "... parties shall exercise all due diligence to minimize the extent ofthe prevention or delay in the performance of the contractgenerally. "

• The Contracting Parties have to act both during the force majeureevent and with respect to its consequences in compliance with theprinciple of 'Bona Fides' in view of realizing the economical aimdefined in chapter 1, so as to remedy the loss of time caused by theforce majeure case as soon as possible and to get the contractualobligations performed within the shortest possible time."

• "In case of "Unabwendbare Gewalt" the parties must make all reasonable efforts to eliminate or overcome the consequences ofsuch an event. In this regard the parties shall work closelytogether and shall establish a new delivery plan within the limitsof their possibilities. The parties are to keep the damages resulting from "Unabwendbare Gewalt" as small as possible and to takewhatever measures are necessary in this regard."

The normal remedy for breach of such an obligation is the payment ofdamages. That is explicitly provided in the following clause:

"En cas de force majeure, les parties contractantes sont tenues deconduire tous les efforts necessaires dans Ie but de supprimeret/ou de diminuer les difficultes et les dommages provoques,auquel cas l'autre partie sera constamment tenue au courant de lasituation. Dans Ie cas contraire, la partie defaillante pourra se voirreclamer des dommages et inter€~ts par l'autre partie."

This obligation to exert one's efforts in order to overcome the obstacle generated by fora majeur-e can be compared to the duty to mitigate loss,more and more recognized within the context of contractual liability (see,e.g., Article 77 of the Vienna Convention of the International Sales ofGoods and Article 7.4.8 of the Unidroit Principles). It emerges from thesame spirit.

5. The End of the Force Majeure: Notice

The occurrence of a force majeure event must be often notified to theother contracting party. Some clauses also provide for notice to be given ofthe end of the force majeure event:


• "The Contractor shall forthwith notifY the Buyer as soon as the saidSpecial and Excepted Risks have ended."

• "The termination of the force majeure shall similarly be notified."• "The affected Party shall also provide notice to the other Party of

"(i) with respect to an ongoing Force Majeure Event, the cessationof the Force Majeure Event, and"(ii) the affected Party's ability to recommence performance of itsobligations under this Agreement"as soon as possible, but in any event, not later than seven (7) daysafter the occurrence of each of (i) and (ii) above or, where theaffected Party has (acting reasonably) vacated the Site, or its relevantproperty, as the case may be, as a result of such Force M<:yeure Event,not later than seven (7) days after the date it becomes or shouldhave becOIne aware of such occurrence."

6. Termination, Re-Negotiation

The suspension of the obligations resulting from for-ce majeur-e cannot beprolonged indefinitely. Most of the clauses provide that, after a certain timelimit, and if the force majeure events have not ended, the contract may be terminated or re-negotiated (re-negotiation itself may lead to termination).

a. Possible Termination

Some clauses only included the possibility of termination, at the instigation of one of the parties, at the end of a fixed time limit, which variesaccording to the different contracts (from 30 days to one year in our sample, or a "reasonable period").

In general, it is the contracting party, other than the one whose obligations are suspended, that may terminate the contract:

• "Si ces circonstances se prolongeaient plus de six mois, l'autre partie serait en droit de refuser l'execution ulterieure des obligationscontractuelles."

• "Si Ie retard de livraison de l'equipment de l'installation pour desraisons de force majeure depasse six mois, l'acheteur a Ie droitd'annuler (sic) Ie contrat. ..."

Less frequently, the party under obligation, who is affected by the foramajeure, may terminate the contract:

"If, after 180 days from the date of the aforesaid notice to one party,the other party shall still be prevented, by the cause as to which itgave notice, from continuing with its performance of the work, thensaid party shall be entitled to terminate this contract...."


Some contracts confer a right to terminate on each of the parties:

• "Dans Ie cas mIla duree des circonstances de force majeure affectant tout ou partie des engagements depasserait un an, chacunedes parties aurait Ie droit de se degager du contrat par simple notification ecrite, sans devoir demander la resiliation aun tribunal."

• "If the execution of substantially all the Works in progress is prevented for a continuous period of 84 days by reason of ForceMajeure of which notice has been given under Sub-Clause 19.2(Notice of Force Majeure), or for multiple periods which totalmore than 140 days due to the same notified Force majeure, theneither Party may give to the other Party a notice of termination ofthe Contract. In this event, the termination shall take effect 7 daysafter the notice is given, and the Contractor shall proceed in accordance with Sub-Clause 16.3 (Cessation of Work and Removal ofContractor's Equipment) ."16

In certain cases, it appears that the occurrence of the force majeure eventimmediately renders performance impossible or illegal. There is then noreason to provide for an initial period of suspension. FIDIC contracts envisage such a situation, where termination is directly envisaged:

"Notwithstanding any other provision of this Clause, if any eventor circumstance outside the control of the Parties (including, butnot limited to, Force Majeure) arises which makes it impossible orunlawful for either or both Parties to fulfil its or their contractualobligations or which, under the law governing the Contract, entitles the Parties to be released from further performance of theContract, then upon notice by either Party to the other Party ofsuch event or circumstance:

"(a) the Parties shall be discharged from further performance,without prejudice to the rights of either Party in respect of any previous breach of the Contract, and

"(b) the sum payable by the Employer to the Contractor shall bethe same as would have been payable under Sub-Clause 19.6(Optional Termination, Payment and Release) if the Contract hadbeen terminated under Sub-Clause 19.6."17

16 FIDIC Conditions of Contract for Construction, 1999, Art. 19.6; cf. Chr. R.Seppala, Of}. cit., pp. 1019-1O2l.

17 FIDIC Conditions of Contract for Construction, 1999, Art. 19.7; d. Chr. R. Seppala, op. cit., pp. 1019-1021.


b. Re-Negotiation

More often, force majeure clauses provide that the parties will review matters if the suspension due to force majeure goes on beyond a fixed time limit.The purpose of re-negotiation would then be to adapt the contract.

• "If the effect of Force Majeure continues for more than 120 daysboth parties shall settle the problem of further execution of theContract by friendly negotiations and reach an Agreement as soonas possible."

• "Si un cas de force majeure durait plus de 2 mois, les deux partiescontractantes se mettront d'accord en ce qui concerne l'executionulterieure du contrat vu les circonstances survenues."

Such clauses are clearly dangerous because they do not provide for anysolution in the event that the "friendly" negotiations do not lead to anyagreement.

Other drafters did make provision for that possibility, and agreed torefer to arbitration:

"Si la force majeure s'etendait sur plus de quatre mois, l'Acheteuret Ie Vendeur entreprendraient immediatement de nouvellesnegociations dans Ie but de prendre les mesures qui paraissent Ieplus appropriees pour atteindre Ie but du contrat. Si dans les deuxmois suivants aucune solution n'a ete trouvee, il est decide d'alleren arbitrage."

Another possibility is to allow the contract to be terminated if agreementcannot be reached as to its amendment:

• "Si, pour une cause de force majeure, l'une des parties est empechee de remplir ses obligations contractuelles pendant une periode superieure a trois mois, les parties se rencontreront pourdeterminer les conditions de poursuite de l'execution du contratou de sa resiliation."

• "In case force majeure lasts continuously for at least six months, thenboth parties shall meet to consult and agree on the necessaryarrangements for the further implementation of the contract. In casethe further implementation is unforeseeable and impossible, thenboth parties shall arrange for the termination of the contract...."

• "Si un cas de force majeure durait plus de 6 mois, les parties contractantes devraient se mettre d'accord en ce qui concerne l'execution ulterieure du contrat, vu les circonstances survenues. Au casml aucune solution ne serait envisageable, les parties auront la possibilite de resilier Ie contrat."


These clauses may very well give rise to difficulties. Failing agreementon adjusting the contract, will the parties be able to agree to terminate it?The first two clauses seem to allow termination of the contract only bymutual agreement; the third is ambiguous on the point. It would be preferable to be more precise regarding the option to terminate the contract inthe event that no other agreement can be reached (Who may terminate?Within what time limits? In what form?). Here are two examples:

• "Si un cas de force majeure provoque un retard dans les livraisonssuperieur a8 mois, les deux parties seront obligees de se mettred'accord, dans un deIai supplementaire d'un mois, sur un nouveaudelai de livraison. Si, al'expiration de ce mois supplementaire, lesdeux parties ne se sont pas mises d'accord, la partie du contrat relative al'unite pour laquelle cet equipement est en retard de plusde 8 mois du fait de la force majeure pourra etre resiliee, partiellement ou totalement, par l'acheteur...."

• "Dans l'hypothese ou les Parties n'aboutiraient pas aun accord surla solution aetre adoptee dans un delai de 30 (trente) jours comptes du debut des negociations, chacune des Parties aura Ie droit deresilier cet Accord, sans aucune penalite."

Two other clauses examined by the Group provide for the interventionof arbitrators in such circumstances.

• "Dans Ie cas 011 Ie cas de force majeure se prolongerait de plusd'un mois, l'Acheteur et Ie Vendeur auront des negociations concernant la prorogation ou l'annulation (sic) du Contrat. Dans Iecas ml il n'y aurait aucun accord, les parties contractantes ont Iedroit de recourir ala Cour d'Arbitrage selon l'article 15 du presentContrat. L'Acheteur et Ie Vendeur s'engagent a reconnaitre ladecision de la Cour d'Arbitrage comme obligatoire."

• "Si Ie retard dfl a la Force majeure depassait 8 mois, la partie alaquelle elle fut opposee a Ie droit, faute d'autre accord, dedemander la resiliation du contrat al'instance arbitrale qui statuera sur la liquidation des rapports entre les parties."18

In all the preceding cases, re-negotiation took place only after theexpiry of a fixed time limit. Some clauses, however, provide for immediatere-negotiation, right after the occurrence of a force majeure event whoserepercussions appear substantial:

18 On the intervention of arbitral institutions in case offorce majeure in countries thenbelonging to Comecon, d. H. Strohbach, Force majeure and Hardship Clauses inInternational Commercial Contracts and Arbitration,]oum. (!!Int. Arb., 1983, pp. 49-50.


• "... the Contracting Parties shall enter immediately into negotiations with each other concerning further performance of the contractual obligations, if the force majeure event and its expectedconsequences will cause a delay of 90 or more days in meeting withthe contractual obligations."

• "Les Parties se reuniront dans un deIai de 10 (dix) jours acompterde la reception de ladite notification afin de negocier et mettre enplace, en toute bonne foi, la solution la plus adaptee a la resolution des troubles causes par la force majeure, que la solution trouvee soit la suspension du contrat, sa modification ou encore saresiliation. "

Lastly, here is a clause that does not make re-negotiation compulsoryas a result of the contract itself, but by virtue of a new agreement, which isto come into force in the event of force majeure:

"... in the event of a delay caused by an occurrence of forcemajeure continuing for period exceeding 180 days from the dateof the notice referred to in subarticle 2 of this Article, and provided that there has not within this period been prior agreementbetween the two parties in writing to renegotiate the terms uponwhich the Contract should be continued, then either party mayexpress his intention by 30 days notice in writing that the Contractis as an end...."

c. Re-Negotiation or Termination

The following clause immediately gives the choice between re-negotiation and termination at the expiry of a first time limit:

"If the delay due to force m<geure in the fulfilment of any of the parties' obligations exceeds three (3) months from the date of the forcemajeure, either the parties shall meet to consider the conditions oftheir continuing relationship by mutual agreement or this contractshall be automatically terminated at the request of either party."

d. Winding Up

If the contract is terminated, the problem of winding up the contractualrelationship will arise. Many force majeure clauses contain no specific provisions in this regard. Occasionally, an explicit reference is made to the clausein the contract which deals with the question of termination in general: 19

"... in which case the amounts due as between the parties shall besettled in accordance with Article 'Termination'."

19 On termination clauses, see ir~fra, Chapter 12.


Occasionally, the clause entrusts the resolution of any problems thatcould arise out of termination to an arbitrator:

"Faute d'accord amiable, la liquidation des rapports contractuelssera soumise al'Arbitrage prevu al'article39."

More and more frequently, however, clauses lay down a regime for termination specific to cases of force majeure. Here are two examples. Such provisions must undoubtedly be specifically adapted to the subject matter ofthe contract in which they are included:

• "... Ie Vendeur s'engage, dans ce cas, aremettre al'Acheteur tousles dessins (y compris les dessins d'execution) et toute la documentation technique necessaire a la fabrication de la partied'equipement non livree, pour completer l'installation."

• "If Force Majeure or abnormal circumstances, as stated above, shallcall for termination of the Contract, the Ministry shall pay the Contractor the following:"1) The amounts payable in respect of the preliminary items as faras the work or service comprised therein has been carried out orperformed, and a proper proportion as certified by the Engineerof any such items, the work or service partially carried out or performed."2) The cost of materials or goods reasonably ordered for theworks or temporary works which shall have been delivered to theContractor or of which the Contractor is legally liable to acceptdelivery (such materials or goods becoming the property of theMinistry upon such payment being made by them)."3) Any additional sum or sums that shall become due in accordance with the provisions of Paragraph 1) of this clause."4) The reasonable cost of repatriation of all the Contractor's staff andworkmen employed on or in connection with the works at the time ofsuch termination. In all cases, the Ministry shall be entitled to retainany sum or sums owed by the Contractor by way of advance paymentsor paid to the Contractor on account of constnlCtion, or in any manner pertaining to the construction."

The ICC Model Franchising Contract prefers to cover the problem ofwinding up by a clause drafted in very general terms:

"Chaque partie peut conserver ce qu'elle a obtenu grace al'execution du contrat avant qu'il n'y soit mis fin. Chaque partie est comptable envers l'autre de tout enrichissement sans cause resultant decette execution. Le paiement du solde final se fera sans delai."20

20 ICC Model International Franchising Contract, Paris, ICC, 2000, Annex 13, No.9.


7. Obligations to Pay a Sum of Money

Despite the existence of obligations to pay sums of money (the price,rental payments, fees, interest, etc.), in most contracts, very few force majeureclauses deal with the specific problems arising out of this type of obligation.

In principle, by virtue of the rule genera non pereunt, the payment of asum of money is never rendered impossible by the occurrence of forcemajeure. If the clause refers to the traditional criteria for force majeure, it isprobably not necessary to specify the position regarding obligations to paya sum of money, since it will be sufficient to apply the principles. Here,however, are two rare examples of express mention:

• "If a force majeure event occurs, the obligations of the parties aresuspended, except for payment of money due."

• "Notwithstanding any other provision of this Clause, ForceMajeure shall not apply to obligations of either Party to make payments to the other Party under the Contract."21

In international trade, however, the situation is often more delicate. 22

Intervention by a State may, for example, prevent the transfer of funds, andmay, in this regard, be a cause of force majeure preventing performance ofthe obligation to pay money due, unless the debtor has an alternativemeans of settlement. Additionally, the substituted procedure must also satisfy the creditor. If the contract provides for a payment of dollars in Italy,the debtor does not fulfill his obligations if he makes the payment in eurosin Germany. Sometimes, leaving aside any fait du prince, certain currenciesmay be unavailable at the time of payment. It may be appropriate to provide for that eventuality, as illustrates this clause taken from a contract relating to the euro currency market:

"If, by reason of the non-availability to the Bank of eurodollars inthe London interbank eurocurrency market, it becomes impossible for the Bank to make or continue to make the Commitmentavailable on the basis contemplated by this agreement, the Bankshall promptly so notify the Borrower whereupon the Bank andthe Borrower shall search for an alternative basis for continuingthe Commitment whether by making the Commitment availablefrom some source other than the London interbank eurocurrencymarket or from other branch or branches of the Bank. If suchalternative is not available or is not acceptable to the Borrower the

21 FIDIC Conditions of Contract for Construction, 1999, Art. 19.2; d. ChI'. R.Seppala, op. cit., pp. 1019-1021.

22 In a particular sector, cf. G.R. Delaume, Change of circumstances and force majeureclauses in transnational loans, D.P.C.!., 1981, pp. 333-359.


Bank shall make available in the New York market to an Americansubsidiary of Borrower, under the guarantee of the Borrower, dollars at a rate equal to the rate at which the Bank would make anAdvance to a major United States domestic company in similaramounts and maturities."

The drafters of clauses should be mindful of the possible repercussionswhen the requirements of force majeure are loosened regarding obligationsto pay sums of money due. If the clause does not require impossibility ofperformance but only excessive difficulty as compared with the usual practices, the rule genera non pereunt no longer necessarily applies. Could adebtor deprived of one source of finance, in order to release himself, relyon the excessively onerous nature of alternative sources of finance?

Certain financial operations may also be prevented by troubles forcingthe lender to suspend his services. The following clause gives a definition ofthe Financial Market Disruption, which causes the contract to be suspended:

"The following prevailing conditions between Effective Date andFinancial Close, as supported by appropriate written evidence,shall constitute a Financial Market Disruption:

"(1) International Finance Corporation (IFC) certifYing to Government that IFC are ceasing or will not lend funds to the Projectbased upon a reasonable assessment of the risk of lending into theAAMB Country generally; or

"(2) IFC certifYing to Government that IFC has insufficient fundsto finance the Project due to a disruption in the internationalfinance markets. "23

8. Insurance Covering Force Majeure Events

Certain force majeure events can be insured. The following clause takesthis circumstance into consideration when providing for the consequencesof the occurrence of such events:

"18.1.3 Insured Events of Force Majeure

"18.1.3.1. To the extent that the consequences of an event of ForceMajeure fall within the terms of the insurance cover required byClauses 17.1 and 17.2, then the Concession Company shall forthwith make the appropriate claims thereunder and shall apply theproceeds as required by Clauses 17.5.4. and 17.5.5.

23 Clause already quoted SLlfJrCl, p. 422, in connection with problems of evidence.


"18.1.3.2. In the event insurance cover is available but is materiallyinsufficient in accordance with normal construction practice tocomplete or repair the Motorway to an operational condition, theParties shall meet to discuss whether and how the provisions ofClause 19 hereof shall apply or whether in conjunction with Clause18.3 hereof some other remedy is available for the continued completion and operation of the Motorway."

9. Differentiated Regime for Each Party

Some elaborate recent contracts provide for differentiated regimesdepending on which party's obligations are affected by force majeur-e.

Such a clause defines in very long provisions the consequences of fora

majeure affecting the obligations of the contracting State and of the partyin charge of performing the project. Here are two typical excerpts:

"20.3. Circonstance de Force Majeure affectant les obligations del'Etat

"20.3.4. Lorsqu'une Phase de la centrale peut techniquement etremise en service mais que la circonstance de Force Majeure affectantles obligations de I'Etat (y compris, en particulier, en cas d'impossibilite pour l'Etat de fournir Ie combustible requis ou de prendrelivraison de l'energie electrique) empeche cette mise en service, laPhase est reputee mise en service ala date alaquelle la Phase auraitpu effectivement etre mise en service si les obligations de l'Etatavaient pu etre accomplies dans Ie delai requis et les stipulations duParagraphe 20.3.5 ci-apn~~s sont applicables, Ie cas echeant.

"20.3. Circonstance de Force Majeure affectant les obligations dela Societe

"20.4.3. Dans l'hypothese Oll la circonstance de Force Majeureresulte d'une circonstance autre qu'une Circonstance interieurede Force majeure et qu'il en resulte une diminution de PuissanceReelle de la Centrale de plus de quarante-cinq pour cent (45 %)pendant vingt (20) jours consecutifs ou pendant plus de trente(30) jours au cours d'une annee, la remuneration Mensuelle de la


Societe ... est reduite, lorsque cette limite est atteinte, pour tenircompte de la diminution de la Puissance Reelle ... Pendant cetteperiode, les penalites PNFn et Rn ne seront pas appliquees.

III. CRITICAL CONSIDERATIONS

The first part of this review described and illustrated the principal elements of a force majeure clause. Attention was drawn to lacunae and imprecisions to be avoided.

Apart from such technical drafting problems, the Working Groupencountered a certain number of questions of substance. These problems,namely the relationship between the force majeure clause, the domestic lawapplicable to the contract and the lex mercatoria, the very concept of forcemajeure and its relationship to hardship situations and to exemption of liability clauses, as well as the effects of force majeur-e, will be described seriatim,before setting out the reasons for which the Working Group considered itinappropriate to propose a standard clause. 21

A. Force Majeure and the Applicable Law

The interest in stipulating a force majeure clause in an international contract must be seen in comparison to the solution that would derive fromthe applicable law in the absence of such a clause.

The romanistic law concept of fora majeure has not been acceptedin all legal systems. Whereas the concept appears undoubtedly to formpart of legal systems such as the French25 and the Belgian,26 the

24 The first French edition of this chapter contained further developments on certain peculiarities of force maJeure in East-West contracts (Dmit des contmts internationaux,1989, pp. 242-244). Such developments have lost most of their interest and they havenot been included in the present edition.

25 Cf. P.H. Antonmattei, Contribution rll'eturie rie la/one rnajeLlre, Paris, L.G.DJ., 1992;G. Viney & P.Jourdain, Les conditions de la Jesponsabilite, Paris, 2nd ed., 1998, pp. 230-253;B. Nicholas, Force Majeure in French Law, in Force majeure and Frustmtion of Contmct, E.McKendrick (ed.), L.L.P., 1995, pp. 21-31.

26 Cf. H. De Page, Traite elhnentaiJe de droit civil beZrse, 3rd ed. II, No. 599; S. Stijns, P.Wery & D. Van Gerven, Chronique de jurisprudence: Les Obligations (1985-1995),JOUTn. Trib., 1996, pp. 726-728.

On that matter, Socialist legal systems were close to romanistic systems, but therewere distinctions to be made between national relationships (sub-distinguishing contracts between enterprises in charge of performing the Plan and other contracts), andforeign trade operations (sub-distinguishing between contracts with other Comeconcountries and contracts with free market enterprises) (cf.]. Rajski, Basic Principles ofInternational Trade Law of Certain European Socialist States and of East-West TradeRelations, D.P. CL, 1978, pp. 9-28).


German27 and the Italian28 legal systems prefer to construct analogousregimes around the concept of "impossibility of performance," which isnot attributable to the party under the obligation. As for English law,29it is radically different from Continental legal systems, since it does notrecognize the principle according to which impossibility of performancedischarges the debtor; the doctrine of "frustration" sometimes operatesto attenuate this, but it considers the problem from a very different angle.American law starts from the same ground, but it also applies the doctrine of "impracticability. "30

The impact of a force majeure clause may appear to be more significantwhen the applicable law does not recognize the principle of exempting theobligor in the concerned circumstances. Such clauses do, however, exist inmost contracts, whatever the applicable law may be. It has been shown thatunder a legal system that knows the above principle, practitioners still feel theneed to re-formulate the conditions, and mainly the effects of such events.

The problem is then whether the rules, which have been discarded, arenot mandatory or do not have a public policy dimension (or, in any event,

A concept offorce majeure has also developed in European law. Cf. Article 4, 6° al. 2(ii) of the directive of june 13, 1990 on package travel ([man. Of[,june 231990, L.158/59), as well as M. Parker, Force majeure in EU Law, in Force rnaJeure and Frustrationof Contract, E. McKendrick (ed.), L.L.P., 1995, pp. 333-353 and the case law referred to.

'27 Cf. M'iiru;hener Kmnrnenlar; Hiirgerliches Geselzlnu;h, Schuldrechl, Allgemeiner Teil, 3rded., 1994, pp. 661-808.

2S Cf G. Cian & A. Trabucchi, Cornrnentario breve al Codice civile, 4th ed., Padoue, 1999,pp. 1336-1338.

'29 Cf. Cheshire Fifoot & Furmston's Law (!fConlnu;l, 13th ed., 1996, pp. 582-605; G.Treitel, Frustration and Force Majeure, Londres, 1994.

30 Cf. E.A. Farnsworth, Contracts, 1999, pp. 637-667.

We shall not attempt here to undertake an in-depth comparative analysis of different national legal systems in this field. For such an analysis, see, in particular, e.M.Schmithoff, Frustration of International Contracts of Sale in English and ComparativeLaw, in Problemes de l'inexecution et de la force majeure dans les contrats de venteinternationale, Assoc. In!. Sr:.lur., Helsinki, 1961, pp. 127-158; P. Van Ommeslaghe, Lesclauses de force majeure et d'imprevision (hardship) dans les contrats internationaux,Rev. Dr: Int. Dr: Cmnp., 1980, pp. 1-59 (especially pp. 13-41);]. Gesang, Force rnaJeure undahnliche Entlastungsgrunde irn Rahmen der LieJerungsvertTiige von Gattungsware, Kanigstein,1980, 230 pp.; D. Rivkin, Lex mercatoria and Force Majeure, in Transnational Rules inInlernalional Commen;ialArbilralion, E. Gaillard (ed.), Paris, e.e.r., 1993, pp. 161-208; U.Draetta, Force Majeure Clauses in International Trade Practice, I.B.LJ, 1996, pp.547-549; P. Pichonnaz, Irnpossibilite et exorbitance, Fribourg (Switzerland), 1997,437 pp.;K. Zweigert & H. Katz, An Introduction to Comparative loaw, 3rd ed., 1998, pp. 516-536;AJ. Goedmakers, Overrnacht bij overeenkmnst en onrechtrnatige daad, thesis Rotterdam, 1998,437 pp.; H. Beale, Partial and Temporary Impossibility in English and French Law, inMelanges en l'honneur de Denis Tallon, Paris, 1999, pp. 219-232.


an international public policy dimension) .:n It seems that, generally speaking,32 at least as far as the legal systems of European countries are concerned, the rules governing causes excusing performance not attributableto the obligor are not mandatory. This legitimates force majeure clausesincluded in contracts governed by common law, or in contracts subject toContinental legal systems that relax the conditions having to be met for theevents under consideration, or laying down detailed rules as regards theireffects (notice, evidence, suspension, renegotiation, etc.). We would alsorecall the example cited above in which the parties had borrowed theirconcept of force majeure from a legal system other than the one governingthe contract, and repeat our warning against the dangers of "deper;age."33

B. Force Majeure and Lex Mercatoria

Analyzing contractual practice demonstrates the existence of similarinternational usages concerning the drafting offorce majeure clauses.34 Whilenot all force majeure clauses are drafted the same way, a certain number ofcharacteristics appear with significant frequency: a less stringent conceptof the conditions required for force majeure, the effect the events may haveof suspending and not extinguishing the obligations, the obligations toinform, to provide evidence and to use all available means to remove obstacles, possible renegotiation after a fixed time limit. In all these respects,clauses arising out of international practice have undeniable similarities,and at the same time they often diverge from the ordinary legal solutionsunder the various national laws.

Moreover, international contracts, which make no particular stipulationand leave these matters entirely to the applicable national law, are very rare.

Compared with the diversity of national legal systems, the practice ininternational contracts has engendered characteristic usages, enshrined incontractual clauses, to govern the occurrence of events that prevent performance of obligations. This finding contributes greatly to the debates onthe contents of the so-called lex mercatoria. 35 Apart from the contracts or

31 Cf. B.Mercadal, Ordre public et contrat international, D.PC.I, 1977, pp. 457-468;Chronique D.P.G.I, 1978, pp. 576-581.

32 Specific regulations in the sphere of, inter alia, international transport law, areexceptions to this principle (cf. for example combined Articles 17 and 41 of the C.M.R.).

33 Cf. supra, p. 407.

34 For this view, already see c.L. Schmithoff, op. cit., p. 150; G.R.Delaume, op. cit., pp.262 et seq.

35 We will not attempt here to fully list the very abundant bibliography on lex mercatmia and to discuss the many controversies surrounding the concept. Recent presentations, with many references, are to be found in F. De Ly, De lex mercatoria, Inleiding opde studie van het transnationaal handelsrecht, Antwerp and Appeldoorn, 1989, 389 + LXV


standard clauses prepared by trade associations or international institutions(such as the Incoterms published by the ICC), usages have also developedin a spontaneous way around negotiating tables.

The phenomenon is verified by most of the clauses analyzed in thepresent volume, but for"Ce majeur-e clauses provide one of the best demonstrations. They offer a strong specificity that sets them apart from alldomestic solutions. 3G

C. Force Majeure, Hardship and Exemption From Liability

1. Notion

Force majeure, in the strict civil law sense, is an unforeseeable and unavoidable event, which is beyond the control of the party under the obligation,and makes performance of the obligation absolutely impossible.

Some of the clauses analyzed above referred to such a concept, but inthe majority of cases, the drafters had substituted a relaxed concept, a more"human" and more "reasonable" concept better suited to commercialpractices. The relaxation of requirements, as we have seen, may take different forms: a more flexible assessment of unforeseeability, of unavoidability or of impossibility of performance and even, on occasion, theabandonment of one or the other of these conditions (more often thannot, this is unforeseeability). Here we see a very marked characteristic ofinternational contracts.

pp.; Transnational Rules in International Cornrneu;ial Arbitration, E. Gaillard (ed.), Paris, ICC,1993; d. also KP. Berger, The New Law Merchant and the Global Market Place, in ThePractice of Transnational Law, KP. Berger (ed.), the Hague, Boston, London, Kluwer2001, pp. 1-22. U. Draetta recalls that the theory of lex mercatoria was initially formulated around the very concept offorce rnajeure (of). r:il., p. 547); arbitral awards areespecially numerous here (d. U. Draetta, id., pp. 555-557; Y Derains, L'impact descrises politiques internationales sur les contrats internationaux et l'arbitrage commercial international, I.H.I")., 1992, pp. 151-166; U. Draetta, R.B. Lake & v.P. Nanda,op. cit., pp. 100-102; D. Rivkin, op. cit., pp. 201-208; ChI'. Bellock, La force majeure etla frustration devant Ie tribunal des differends irano-americains, Dr; Prato Cornrn. Int.,1996, pp. 406-449). We would like to point out that this time the force rnajeure clausesenrich the contents of the lex mercatoria.

36 In this respect thefrm;e rnajeure article found in the Unidroit Principles (Art. 7.1.7)is not fully satisfactory. The suspensive role of force majeure, so apparent in clausesdrafted in practice, is not emphasized. No provision is made for renegotiation. The article does not mention any obligation to make efforts to overcome the obstacle. (d. M.Fontaine, Les dispositions relatives au hardship et a la force majeure, & Contratti cornrnen;iali internazionali e Princif)i [fnidmit, Giuffre, 1996, p. 190; U. Draetta, Les clauses deforce majeure et de hardship dans les contrats internationaux, Dir; del Cornrn. Int., 2001,pp. 297-308, I.B.LJ, 2002, pp. 348-351). The very similar Article 8.108 of the Principlesof European Contract Law makes the same critical observations.


Given the generally suppletive nature of national laws in this area, theparties are certainly free to adopt, by agreement, a more or less flexibleconcept of fOTce majeur-e excusing performance, depending on the specificnature of the obligations that are likely to be affected, or even the relativestrength of the parties to the negotiations. The important point is for thedrafters of clauses to be aware of their options, which does not always seemto be the case.

Analysis of the clauses also highlighted the problems that may arise asa result of the relationship between the definition and the enumerationthat frequently accompanies it. Sometimes, the aim of the list is to equatewith fOTce majeuTe certain events that do not necessarily have the requiredcharacteristics (for example, strikes), and, consequently, to enlarge thefund of causes excusing performance. Sometimes, however, as we haveseen, the clause is simply poorly drafted. In this respect, drafters of clausesare advised to be particularly careful to set out the conditions under whichthe events listed will be considered fOTce majeuTe.

The very principle of using an enumeration is sometimes questionedbecause of the risk of problems with interpretation, just discussed; in theory, moreover, a good definition should suffice to cover all possible instances.The dominant practice, however, is the opposite. The justification given is,inteT alia, the desire to be as explicit as possible with regards to the intentions of the parties in apportioning the risks.

2. Hardship and Exemption From Liability

Relaxing the requirements may reduce, or even abolish, the distinctionthat normally exists between fora majeur-e clauses and two other types ofclause, hardship clauses and clauses excluding liability.

a. Hardship37

Hardship and fOTce majeuTe are similar in that the events in question, inboth cases, should, in principle, be unforeseeable and unavoidable.However, whereas fOTce majeuTe normally renders a contract impossible to perform, the incidence of hardship merely makes it substantially mor-e difficultfor one of the parties. The balance of the contract is upset, but it remainspossible to perform it.

That difference, which is clear in theory, is rather blurred where thefOTce majeuTe clause relaxes the traditional requirements justifying impossibility of performance. Above, we cited certain examples of wording such as

37 On hardship clauses, see infra, Chapter 9.


"... des causes ... qui pourraient mettre obstacle ala marche normale de l'approvisionnement, de la fabrication ou des expeditionsdes contractants" or

"... any cause beyond its control making it impossible or exorbitantfrom an industrial or commercial standpoint to perform its obligations."

Freedom of contract seems to permit such slippage from one conceptto the other. However, it is important, yet again, for drafters of clauses tobe aware of the problem. It is also important to adapt the regime properlyto the hypothesis. The effects normally attached to circumstances of hardship are not the same as the consequences of force majeure. For the one,emphasis is placed at the outset on re-negotiation of the contract (it is stillpossible to perform the contract, but under different conditions if balanceis to be restored). For the other, the question of suspending the obligationsarises initially (as it has become temporarily impossible to perform them,but when the obstacle has been removed, the contracting parties will findthemselves once again in the original circumstances), and re-negotiationshould only be considered in the event of prolonged impossibility. If thealleged force majeure clause mutates in the event into a hardship clause, itmay perhaps be appropriate to examine whether the usual consequencesof force majeure can be maintained. Will it not be appropriate, for example,to consider immediate renegotiation, not preceded by a longer or shorterperiod of suspension?

Another problem is having both a force majeure clause and a hardshipclause in the same contract. It goes without saying that those two clausesshould be drafted in a perfectly coordinated manner, and that the relationship between them must be very precise, especially if the conditions forforce majeure are relaxed as regards impossibility ofperformance.38 An interesting system is to merge the two hypotheses into the same provision, whiledistinguishing them. This could facilitate the understanding of theirrespective scopes:

"Force majeure and undue hardship

"9.1. The Manufacturer shall not be held responsible to the buyerfor any failure to perform, including late delivery or failure todeliver, which failure to perform is caused by occurences beyondthe Manufacturer's reasonable control, including, but not limitedto, late delivery or non-delivery of manufacturing materials by suppliers, strikes or other industrial action, suspension of or difficulties in transportation.

38 On that matter, d. M. Marmuszteyn, op. cit., pp. 803-804.


"9.2. In the event that, due to any reason which was not foreseeable at the time the contract was entered into, and which reason issuch as to render the Manufacturer's obligations excessively onerous in relation to the contractual obligations originally agreedupon and, in any event, is such as to increase the Manufacturer'sobligations by more than 20 % (twenty percent) compared to thevalue of such obligations as originally foreseen, then the Manufacturer shall be entitled to request an appropriate revision of thecontractual terms or, in the event that the parties are unable toreach an agreement as regards such a revision, the Manufacturermay terminate the contract."

However, there is a tendency to confuse the two notions, with clausesgiving the same regime in both cases of impossibility of performance andincreased difficulty.39 This method can be dangerous, because imprecise orambiguous drafting creates the risk of raising problems of interpretation asto the conditions of implementation.

Practitioners do not always follow abstract logic. In a remarkable presentation at the colloquium organized in Paris to celebrate the 25th anniversary of the Working Group, Professor Draetta mentioned project financingoperations, where risks are allocated according to the relative bargainingpowers. Banks, whose intervention is necessary to the viability of the project,are able to dictate their terms. They cannot accept that reimbursement ofthe loans could be affected by the normal consequences of force majeure orhardship (suspension, termination or re-negotiation of the contract).Irrespective of which kind of disruptive event occurs, banks demand fullprotection. Risks are exclusively distributed between the other parties.10

b. Exemption of Liability41

The fora majeure clause is different in principle from a clause excludingliability: in theory, a force majeure event, which is beyond the control of theobligor, does not entail his liability.42 The force majeure clause governs circumstances that exclude per se any liability: its purpose is not to exclude by

39 Cf. supra, pp. 405-406.

40 U. Draetta similarly refers to the antitrust risk in contracts for the purchase ofcompanies, as well as to the risk of change of control injoint ventures (U. Draetta, Lesclauses de force majeure et de hardship dans les contrats internationaux, Dir. del CO'fn'fn.Int., pp. 303-307, I.B.I"1, 2002, pp. 352-357).

41 On clauses excluding or limiting liability, d. sLI!JTa, Chapter 7.

42 In any event, that is the general position in legal systems which recognize the concept of force rna:jeure or an equivalent regime. Even in those systems, however, the personupon whom certain obligations are incumbent may have to answer for the force rna:jeure(obligations de garantie) .


agreement liability that would otherwise be incurred. That is why themajority of force majeure clauses, as we have seen, do not consider it necessary to confirm explicitly the absence of liability on the part of the partyunder the obligation.

However the distinction becomes less clear-cut where the clause relaxesthe strict requirements of the concept of force majeure to the extent of taking into consideration events that are foreseeable or avoidable. When anobligor is no longer liable for non-performance due to events that wereforeseeable, or to obstacles that he could have avoided, the force majeureclause plays the same role as an exemption clause. With such an extensiveclause, the obligor transfers to the other party certain risks that he normallyshould have borne and which would have entailed his liability.

Therefore, such relaxation of the requirements, whether they resultfrom a broad definition of force majeure or from the occurrence of certainunqualified events in the enumeration, may partially transform the forcemajeure clause into a clause excluding liability. That is the case, for example, when the clause excludes the liability of the obligor in any case of fire,even those that could have been avoided.43

There are, however, certain limits to freedom of contract. Clauses,which exclude or restrict liability, are generally not accepted by legislationwithout reservation. In French law, for example, they cannot exempt aparty from fraud nor from gross negligence.44 A clause based on too lax aconcept of force majeure runs the risk of becoming ineffective when invokedin certain circumstances.

D. Effects

1. Exemption and Suspension

According to the classical theory, force majeure discharges the partyunder the obligation, without liability.45 The practice in international contracts confirms this effect force majeure has of excusing performance, but itpushes the extinguishing effect into a secondary role, and replaces it witha suspensory effect in the primary role.

Most international contracts incorporate a time dimension; they provide for obligations to be performed continuously or successively. Yet, ingeneral, force majeure events occur only for a certain time, after which per-

43 Cf. SU!JTCl, pp. 355-356.

44 Cf. supra, pp. 384-385.

15 Cf. for example, in French law, G. Viney & P.Jourdain, op. cit., p. 246.


formance of the obligations will probably become possible again. 46 As theparties often have a substantial common interest in the survival of thecontract, they will stipulate that the obligations affected by fora majeur-ewill initially only be suspended.47 The force majeure clause is not designedto be a method of avoiding obligations, but is intended to provide theparties with a temporary respite, enabling them to resume normal relations at a later date. 48

That suspension may be organized in various ways, as seen in the analytical part. It is important, inter alia, to determine whether the initial lengthof the contract is or is not to be extended by the period of suspension.

2. Termination, Re-Negotiation, Adaptation, Winding Up

If impossibility of performance extends beyond a given time, suspension of performance of the contract becomes intolerable, and the partiesmust take other measures. Here also, it is clear that the aim is to ensurethat the contract survives. Although termination is provided for in someclauses, it is more often stipulated, particularly in contracts for the construction of units, that the contract is to be re-negotiated with a view to itsbeing adapted. The force majeure clause therefore falls under the category asa revision clause. 49

The commitment to re-negotiate raises substantial problems, inter alia,that of the very validity of such an agreement (particularly in English law),and that of the role of the arbitrator who may be called upon to modifY thecontract, in the event the parties fail to agree. Those difficulties are alsoraised, mutatis mutandis, in the chapters concerning letters of intent,50 hardship clausesS1 and first refusal and most-favored customer clauses.52

In the event of termination of the contract, the problem of the winding up of contractual relations arises. We have seen above how certain for-cemajeure clauses deal with this, and pointed out the developments in recentcontracts.

16 The position is different for short-term contracts, for example certain freight forwarding contracts.

47 The classical theory generally also confers a suspensive effect on temporary impossibility of performance, but that hypothesis is presented as a special case which is something of an exception. The exception becomes the rule in long-term internationalcontracts.

4S C.R. Delaume, op. cit., p. 244.

19 Cf. already Ph. Kahn, op. cit., p. 468, as well as C.R. Delaume, op. cit., p. 259.

50 Cf. SLlfJTfL, Chapter 1.




3. New Obligations

Another aspect of the contractual effects of force majeure emerges particularly from the group's proceedings: the occurrence of the events considered causes the parties, or one of them, to incur new obligations.

First of all, the other contracting party must be notified of the forcemajeur-e, and it must be provided with appropriate evidence. Then, the clauseimposes on the parties the task of striving to remove the obstacle offorce majeure.That obligation, which also reflects the desire to ensure that the contractsurvives, is consistent with the view that the obstacle is in principle considered to be temporary and as entailing only a provisional suspension of theobligations affected. Another obligation sometimes provided for is that ofgiving notice of the end of the force majeur-e.

Yet again we can see, in relation to the effects of fora majeure, the exceptional richness of the law created by contractual practice, which is in sharpcontrast to the over-simplification of the classical theory.

E. AStandard Force Majeure Clause?

Several participants in the Working Group mentioned the advantagesof a standard force majeure clause. The analysis of the clauses found, in practice, showed the poor quality of much of the drafting: imprecision, ambiguities, lacunae.

Admittedly, some carefully crafted standard clauses are already available to practitioners. They are, in general, force majeure provisions includedin standard contracts of large diffusion, for example, in the GeneralConditions drawn up by the U.N. Economic Commission for Europe53 orin the new FIDIC contracts. S4 One also knows the standard force majeureclause prepared by the International Chamber of Commerce, in its recentnewedition.55

Could the Working Group not also, in its turn, propose a standard clause?

1. Arguments Against Drafting a Model Force Majeure Clause

That task was not undertaken for several reasons.

53 Cf. other examples in K.H. Bockstiegel, op. cit., as well as in U. Draetta, ForceMajeure Clauses in International Trade Practice, I.B.LJ, 1996, pp. 553-554.

51 Cf. Chr. R. Seppala, FIDIC's New Standard Forms of Contract: Risks, ForceMajeure and Termination, 1.B.LJ, 2000, pp. 1013-1025.

55 1. C. C. Force Majeure Clause 2003 and ICC Hardship Clause 2003, Paris, ICC, 2003.


First, the concept of force majeure may be interpreted in various, moreor less strict ways, and the drafting of a clause depends obviously on theparties' wishes. There is a whole spectrum of ways in which the conditionsfor force majeure may be relaxed.56 In addition, the other elements of theclause may also need appropriate drafting in order to adapt to the case inpoint, for example, methods of giving notice and of providing evidence,the length of time of the suspension, possible solutions if the force majeureevents persist, etc.57

Instead of proposing one or two standard clauses, it appeared to usthat it would be more useful to provide practitioners with an inventory ofdifferent aspects of a fora majeur-e clause together with an indication of thepossible variations and the necessary caveats. That was the principal objectof the first part of this review. Each drafter should take from it the appropriate materials to construct himself the clause which would best suit hiscontract. 58

A second reason is linked to a pretty fundamental observation, whichthe majority of negotiators do not yet seem aware of. In a great majority ofcases, it seems that contracts contain only one force majeur-e clause, which isintended to govern the non-performance of any obligation. Yet, all theobligations arising from a contract are not necessarily affected in the sameway by the occurrence of a force majeur-e event. The payment of the purchaseprice by the buyer, for example, is more rarely rendered impossible thanthe supplying of the goods by the seller.59 That observation leads to the suggestion that a well-drafted contract should not contain only one fora

majeure clause, but several, and possibly as many as there are obligations,each one to be treated according to its specific nature.

Such a desire for perfection could admittedly lead to excessively complicated negotiations and to overly ponderous contracts. But, within reasonable limits, negotiators should consider whether certain obligationsshould not be made subject to a particular regime as far as force majeure isconcerned.

Another argument against the drafting of a single standard clause isthat the wording of the clause (or clauses) must also take account of thespecific nature of each contract, and maybe even of each of the contract-

56 Cf. supra, pp. 403-406.


5S Such was also the approach taken by UNCITRAL in its Legal Guide on Drawing UpInternational Contracts Jor the Construction oj Industrial Works, New York, 1988, pp. 233-240(exemption clauses).



ing parties. For example, the risk of ice would not be included in a contractthat was to be performed below the equator, but that possibility doesdeserve particular mention if the supplies are to come from Finland orCanada. Problems in supplying raw materials are relevant to a contract forthe supply of goods but not to an agreement relating to the delivery ofintellectual services. The period of suspension of obligations is a functionof how tolerable that is for the parties, taking account of whether punctualperformance of the contract is more or less important. Fait du prince has aspecific relevance when the State itself is one of the contracting parties. Wehave seen contracts that, in a very adequate way, had different provisionsfor the respective parties, especially concerning circumstances excludedfrom the notion of for-ce majeure 60 and the consequences of the occurrenceof a force majeure event. 61

For these different reasons, the Group is not proposing a standard force

majeure clause. However, the analytical section of the review contains theprincipal sources of inspiration, which may be useful in the drafting ofclauses adapted to the special needs of the contract. 62

2. The Expression Force Majeure

As regards terminology, is it appropriate to recommend the use of theexpression force majeur-e clause?

There are two arguments for not doing so. First, the concept of force

majeur-e is not recognized in all legal systems. If the contract is governed bya legal system, which does not cover this concept, the expression may leadto confusion.63 Secondly, even if the applicable law does recognize the concept of fone majeure, numerous clauses are designed to relax its requirements and consequently to change its nature.

When the first edition of this chapter was drafted, several codificationsregarding international trade, which were then recent, had abandoned anyreference to the expression for-ce majeure. The Comecon General Conditionsreferred to "circumstances constituting an insurmountable force" (Section68). The Geneva Conditions, in particular those relating to the supply ofequipment, mention "causes excusing performance" (Article 10). TheVienna Convention on the International Sales of Goods deals with the subject (Article 79) under the title "Exemptions."

60 Cf. supra, pp. 416--418.

61 Cf. SU!JTCl, pp. 438-439.

62 BJ. Cartoon, Drafting an Acceptable Force Majeure Clause, Journ. ofBusiness Law,1978, p. 232, is also reluctant towards drafting standard force rnajeure clauses.

63 L. Kopelmanas described the concept of force majeure as a "fausse idee claire"(something which only seems self-evident) (op. cit., p. 305).


Some of the members of the Working Group proposed to following thesame route when drafting clauses.

Other participants had stressed the extent to which the expression forcemajeure is anchored in international customs, even if its content varies; theywondered whether it would be wise to use other expressions that may causeeven more confusion. It is true that most of the clauses in our sample usedthe words force majeure.

Important new developments have caused the concept of force majeure

to be recognized as a concept at the international level. The UnidroitPrinciples have entitled their Article 7.1.7 force majeure, in the English version as well as the French one. 61 The new FIDIC contracts have abandonedthe expression "special risks" of earlier editions; clause 19 is now called foramajeure (in French) .fiG

The essential point is to agree on the meaning of the words used. If theexpression force majeure retains the support of negotiators, they are advisedto specify its scope clearly.

64 Corresponding expressions are used in the Italian (forza maggiore), Spanish (juerzamayor) and Portuguese (fon;a maior) versions, and even in the Russian version (where Jarsmajor accompanies the expression nepreodolimaia sila). The German version has translated force majeLlre into IIijhere Gewall.

65 Cf. Chr. R. Seppala, op. cit., pp. 1019-1021.

CHAPTER 9

HARDSHIP CLAUSES

I. INTRODUCTION

A. Sanctity of Contracts and Substantial Change of Circumstances

When parties enter a contract, they bind each other to create a situation on which they can legally rely. The principle of sanctity of contractsmakes each other's undertakings enforceable. The firm, which has a contract with a supplier, knows that the goods will be made available in duetime (or that it will be indemnified in case the supplier fails to perform),and the supplier can rely on the buyer to pay the price.

However, each party accepts to be bound, under the circumstances prevailing at the time when the contract is executed. The goods are boughtbecause the buyer can use them within his scope of activity; the price is setby reference to the current value of the goods.

It can happen, especially in long-term contracts, that such circumstances change, sometimes substantially, when performance has to takeplace. The goods to be delivered have lost all utility, because of a change intechnology, because certain markets are now inaccessible for political reasons or because some new regulation prohibits their use. Because of astrong inflation or of a crisis in the currency exchange market, the agreedprice now corresponds only to a small part of the value of the goods. Undersuch conditions, should the contract still be performed such as it is? Is sanctity of contract an absolutely inflexible principle? Is it not conceivable to readapt the contract, or to terminate it?

B. Solutions in Comparative Law

The issues are known to each legal system, but answers vary.!

1 Only a brief synthesis will be presented here. For a thorough discusssion, cf. D.Philippe, Changemenl de cirwnslaru;es el bouleversernenl de l'er;onornie wnlrar;luelle, Brussels,Bruylant, 1986, 714 pp. Cf. also C.M. Schmithoff, Frustration of International Contractsof Sale in English and Comparative Law, in Pmblemes de l'inexecution et de la force maJeuredans les contrats de vente internationale, Assoc. Int. Sc.Jur., Helsinki, 1961, pp. 127-158; H.Lesguillons, Frustration, force majeure, imprevision, Wegfall del' Geschaftsgrundlage,Dr; Pral. Cmmn. Inl., 1979, pp. 507-532; P. Van Ommeslaghe, Les clauses de forcemajeure et d'imprevision (hardship) dans les contrats internationaux, Rev. Dr. Int. Dr;Comp., 1980, pp. 1-59 (especially pp. 13-41); H. Van Houtte, Changed circumstancesand pacta sunt servanda, in Transnational Rules in International Commercial Arbitration, E.

453


In France and in Belgium, the problems are examined under the theory of imprevision, applicable only if the change of circumstances leads tounbalanced obligations. In both countries, courts refuse, in principle, tore-adapt the contract, except in French administrative case law or underparticular legislation.

Elsewhere, approaches are less restrictive. In many other legal systems,statutory provisions or judicial interpretations allow a court either to terminate the contract or to adapt it, when circumstances are substantiallychanged. Statutory provisions are found, e.g., in Greece (Civil Code, Article388), Italy (Codice Civile, Article 1467), the Netherlands (N.B.W., Article6-259) and Russia (Civil Code, Article 451). On the other hand, significantcase law solutions have developed in countries such as Germany (theory ofWegfall der Geschaftsgrundlage, related to the principle of Treu und Glauben) ,Switzerland (several legal bases, including the very interesting "mistake onfuture circumstances") or Italy (with the concept of presupposizione). InEngland, courts have developed the doctrine offrustration, partly through thefamous Comnation cases (what was to be done with the balconies rentedalong the route of the procession due to take place for the coronation ofKing Edward VII, after the ceremony was cancelled?). The concept of frustration also belongs to American law, where one finds the notion of impracticability, based in the Uniform Commercial Code (Article 2, Section 615a)and retained by the Restatement Second on Contracts (Section 261).

Comparative law reveals the unduly restrictive approach of French andBelgian law. Imprevision concerns cases in which performance of the contract has become excessively onerous for one party; the same approach isfound in Article 1467 of the Italian Codice Civile (eccessiva onerosita). Butthe issue is often broader; it also includes situations in which the change ofcircumstances deprives the contract of all economic utility for one party,without necessarily rendering the respective obligations unbalanced (d. acontract for the supply of some raw material, which the buyer cannot useany more due to a technological change). Such is the approach of theGerman notion of Wegfall der Geschaftsgrundlage (disappearance of the contract foundations), of the Italian presupposizione, of frustration and impracticability under the common law (the Restatement Second refers to "the occurrenceof an event the non-occurrence of which was a basic assumption on which the contract was made'). The Dutch N.B.W. uses a very broad formula: Article 6-259concerns the occurrence of unforeseen circumstances"ofsuch a nature thatunder the criteria of reason and equity, the other party cannot expect that the contract remains fully unchanged."

Gaillard (ed.), Paris, ICC, 1993, pp. 105-123; M. Prado, La theorie du hardship dans lesPrincipes de l'Unidroit relatifs aux contrats du commerce international, Dir. del Cormn.Int., 1997, pp. 323-373; K. Zweigert & H. Katz, An Inlrodur;lion 10 CornfJaraJive Law, 3rded., 1998, pp. 516-536.

Hardship Clauses • 455

A great variety of solutions appears. Substantial change of circumstances is generally taken into consideration, but not always. When it is, thelegal basis may be a statute or case law. Each legal system takes its position:either in favor of the narrow approach of excessively onerous performanceor of the broader notion of disappearance of the foundations of the contract. Original concepts have developed in the different jurisdictions.Remedies offered may be adaptation of the contract, or its termination, ora combination of both, with different variations.

C. Hardship Clauses

The above explanations can be a source of concern for drafters ofinternational contracts. A middle or long-term undertaking runs the riskof being subject to a change of circumstances. If the applicable law, such asFrench or Belgian law, gives absolute prominence to the principle of sanctity of contracts, a party may find itself bound by obligations that will havebecome unbearable, or by a contract that will have lost its economic purpose. In the more numerous cases, where the applicable law permits thecontract to be reconsidered, it is up to a court to evaluate the situation, andthe remedies available are not necessarily adequate. For instance, if the lawprovides only for termination of the contract, this will often be consideredan excessively radical solution.

Hardship clauses have appeared in this context. They organize thereview of the contract when changed circumstances have deeply altered theeconomy of the operation.2

A long-term supply contract requires a minimum number of deliveries.An economic crisis intervenes, creating a set of circumstances completelydifferent from the one originally envisaged by the parties. The purchaseris compelled to reduce his production by a substantial amount. By invoking the hardship clause, he obtains the agreement of his co-contractor onthe reduction of the agreed minimum.

2 On hardship clauses, cf. also B. Oppetit, L'adaptation des contrats internationauxaux changements de circonstances: la clause de "hardship," Clunet, 1974, pp. 794-814;J.H. Dalhuisen, De betekenis van de "hardship" clausule, Ned. .Jurist. Blad, 1976, pp.173-184; P. Van Ommeslaghe, Les clauses de force majeure et d'imprevision (hardship)dans les contrats internationaux, Rev.lJr. Int. Dr. Comp., 1980, pp. 1-59; U. Draetta, R.B.Lake & v.P. Nanda, Breach and Adaptation of International Contracts, Salem, 1992, pp.191-198; P. Moisan, Technique contractuelle et gestion des risques dans les contratsinternationaux: les cas de force majeure et d'imprevision, 35 Les Cahiers de Droit (1994),pp. 281-334; W. Den Haerynck, Drafting Hardship Clauses in International Contracts,in Structuring International Contracts, D. Campbell ed., Kluwer, 1996, pp. 231-242;J.M.Mousseron, Technique r:ontnu;tuelle, Paris, 2nd ed., 1999, No. 1655-1681; U. Draetta, Lesclauses de force majeure et de hardship dans les contrats internationaux, Dir: del Comm.Int., 2001, pp. 297-308, I.B.LJ, 2002, pp. 347-358; H. Konarski, Force majeure andhardship clauses in international contractual practice, I.B.LJ, 2003, pp. 405-428; M.Prado, l"e hardship dans le droit du commerce international, Brussels and Paris, 2003.


Another contract contains a price review clause, one of whose parameters refers to quotations for certain oil products. The disruption of theoil market completely upsets this formula for conversion. The hardshipclause contained in the contract enables the re-negotiation of the formulafor review.

These two examples demonstrate the role that hardship clauses can fulfill in circumstances characterized by the extreme volatility of the economicsituation.

The term "hardship" is frequently employed, in practice, to describethe clause in question, even in contracts drafted in other languages thanEnglish. The Unidroit Principles on international commercial contractshave also retained the term "hardship" not only in the English version, butalso in the French, Italian, Spanish and Portuguese editions, as title of thechapter dealing with change of circumstances (Articles 6.2.1 to 6.2.3).3

D. Hardship and Force Majeure

The substantial change of circumstances, which the typical hardshipclause encounters, is connected with the occurrence of events that upsetthe economics of a contract, with the result that its performance becomesunusually onerous or devoid of purpose for one of the parties, but withoutrendering such performance impossible. On the other hand, for forcemajeure, there has to be an event that totally prevents the performance ofthe contract, whether temporarily or permanently. Whereas the change ofcircumstances may lead to the amendment or termination of the contract,force majeure brings about its suspension (in the event of temporary impossibility) or termination (in the event of complete impossibility). The common link between the two concepts is the occurrence of unforeseeable andunavoidable events.

The difference between change of circumstances and force majeure isclear-cut on the theoricallevel, but, in practice, it is often the case that force

majeure is contractually defined in a way that weakens the requirement ofimpossibility of performance. Force majeure and hardship clauses then tendto deal with similar situations, but the consequences may remain different(a force majeure clause will stress suspension of the obligations, while a hardship clause will be centered on re-negotiation). However, there is a tendency to integrate the two notions in clauses covering both hypotheses.

3 The title becomes "Anderung del' Geschiijtsgrundlage' in German. In the Spanish version, "excesiva onervsidad" is used as a synonym. On these provisions of the UnidroitPrinciples, cf. infra, p. 488.


Such interferences have already been examined-with certain warnings-in the chapter dealing with force majeure clauses, which has also discussed the possible coexistence of both clauses in the same contract.4

E. Hardship and"Sujetions Imprevues"

Civil engineering contracts often provide for the situation where unexpected difficulties, for example, regarding the nature of the soil, becomeapparent during the course of the performance of the contract. Variousremedies are possible, in particular the re-negotiation of the contract orthe complete assumption of these risks by the contractor. In the absence ofany clause, the French administrative law theory, known as sujitionsimprevues, can give the contractor the right to an indemnity if he is nevertheless obliged to perform the contract. Apart from the fact that the application of this theory is limited to public works and supply contracts, thedifference between sujetions imprevues and imprevision lies, in principle, inthe fact that the cause for the former exists prior to the contract.5

F. Hardship Clauses, Index Clauses, Review Clauses, Exchange Clauses,Adaptation Clauses, Etc.

Apart from hardship clauses, there are various types of clauses enablingthe amendment of the contractual conditions in certain defined circumstances, for example, in the event of variation of the costs, prices, salaries,exchange rates, or when one of the parties finds itself able to contract onmore favorable terms with a third party (most favored client clause) orreceives a more favorable offer from a competitor, etc. Such clauses differfrom hardship clauses inasmuch as they provide for the modification of theoriginal circumstances based on the occurrence of well-specified events(and not, for example, as result of "any unforeseen upsetting of the economic circumstances"). Consequently the effect on the contract can oftenbe pre-arranged: immediate indexation, adjustment of exchange rate,alignment on more favorable conditions offered to third parties, etc. (whereasthe circumstances in a hardship clause are such that they do not enable priorarrangements for amendment; re-negotiations will be required).

But the distinction is not absolute. On the one hand, certain clauses,known as most-favored client clauses, provide for a re-negotiation on thebasis of the conditions offered to third parties, not an automatic realignment. 6 As far as monetary changes are concerned, apart from clauses providing for indexation or automatic re-adjustment, there are likewise review

1 Cf. supra, pp. 443-445.

5 On sujetions irn!Jre1Ju,es in French law, d. R. Chapus, Droit administratifgenhal, Paris,12th eel., 1999, pp. 597-599.

Ii On the last two types of clauses, cf. infra, Chapter 10.


clauses that call for a re-negotiation of the contractual conditions. As willbe seen, certain hardship clauses are very specific as to the circumstancesin question.

Hardship clauses and other clauses (including force majeure) can becomplementary, for example, when unexpected events completely alter theeffect of an index clause. It is worth providing simultaneously for the different types of clause, since they can be used either separately or togetheraccording to the circumstances.

G. Hardship Clauses and Safeguard Clauses

In French, the expression clause de sauvegarde is sometimes used as atranslation for hardship clause, but this can create confusion. Safeguardclauses in public international law are those that enable a party to waive,temporarily, some or all of the provisions of a treaty, owing to momentarydifficulties, which need not necessarily have the characteristics of unavoidability and unforeseeability, common to force majeure and imprevision. 7

II. PRACTICE

A. General Observations

Are hardship clauses frequently inserted in international contracts?Have these clauses existed for a long time, or is their appearance recent?Are they becoming more frequent? Are they especially linked with certainsectors of the economy? To certain types of contracts? Who takes the initiative in proposing their insertion? Are they avoided in dealings with certain partners?

First of all, it seems that hardship clauses have been used in international contracts in earlier troubled periods of the 20th century, but thattheir insertion seems to have multiplied greatly in the 1970s. The lack ofcertainty ensuing from the upsetting of the international economic andmonetary system, as well as the petroleum crises, help explain this phenomenon. The rapid increase in the recourse to hardship clauses was, atfirst, well reflected in their drafting: from a very simple structure and general composition, some of these clauses, within a few years, had reached animpressive degree of elaboration.

In the more recent past, hardship clauses seem to have attained a certainstate of stabilization. While different features of force majeure clauses wentthrough a marked evolution since the first French edition of this book,8 the

7 Cf. A. Manin, A propos des clauses de sauvegarde, Rev. Trim. Dr: EUT., 1970, pp.1-42, and especially pp. 7-12.

8 Cf. SU!JTCl, pp. 400-401.


new hardship clauses gathered by the Group revealed few innovations. Thetendency to increased sophistication seems to have slowed down.

Long-term contracts are clearly those where hardship clauses are mostfrequently stipulated, since operations due to be performed over a longperiod of time are more vulnerable to modified circumstances.9

The sectors of the economy, where hardship clauses appear to besometimes or often provided for, are notably those of large works projects,the petroleum industry, chemicals, iron and steel, non-ferrous metals,mechanical engineering, data processing (where technological modifications are especially significant) and banking (international loans). Particular characteristics of the clauses used correspond to the diversity of thesectors they cover; these will be pointed out in the following analysis.

Putting hardship clauses into effect gives rise to problems of interpretation of considerable delicacy and requires much in the way of true cooperation between the parties. The insertion of such a clause is thereforeeasier when the contracting parties belong to the same milieu, with thesame economic, legal and cultural background, and when, by extension,they have enjoyed good business relations for some time, and wish to preserve them.

By contrast, it is more difficult to include hardship clauses in a contractconcluded between partners from different backgrounds, as, for example,in relations between industrial countries and Third World countries. TheEuropean party will fear any provision that might threaten the principle ofsanctity of contract (or more directly, which might bring about the refusalby the export credit guarantee organization to give cover); but, sometimes,it is the partner from the developing country who, being anxious to securethe full anticipated advantage of the contract, refuses to insert in it a clauselikely to produce uncertainty.

The hardship clause may also appear when there is an imbalance ofpower between the contracting parties: the stronger party can ensure theinsertion of such a clause drawn up so as to act unilaterally in its favor.

A few cases were made known where re-negotiation of the contracttook place without there being a hardship clause, and without apparentlyinvoking an applicable national law that would provide remedies forchange of circumstances. Certain situations can, in fact, compel the partners to maintain their contractual relationship in spite of all difficulties,even when the upsetting events make the adherence to the original provisions impossible. Clearly, amicable re-negotiation is always possible betweenunderstanding partners.

9 This will be discussed infra, pp. 487-488.


B. Critical Analysis of Hardship Clauses

The Working Group was able to proceed to a systematic study of about50 hardship clauses in the first stage, and about 20 more when updatingthis review. Before setting out the results of this analysis, the fact shouldbe stressed that not all the hardship clauses include necessarily all thecharacteristics that will be discussed. Each sector of the economy, eachtype of contract, each set of partners has its own requirements. The combined analysis should however represent a useful check-list for thoseresponsible for drafting any hardship clause. The degree of sophisticationof certain clauses is remarkable, and features introduced in clauses in oneparticular sector could well be employed, mutatis mutandis, in other typesof contract.

Hardship clauses always contain two main parts. The first part definesthe hypothesis under which the clause will apply. This part itself consists oftwo elements:

1. certain circumstances, more or less specific, which2. produce certain consequences in the contractual relationship.

The second part of the clause stipulates the procedure applicable incase the hardship event occurs. This ranges from the simple agreement tore-negotiate the contract, formulated without any further details, to theorganization of an extremely complex procedure, involving, in particular,recourse to third parties, arbitrators or experts.

1. Preamble

Certain hardship clauses start with a short preamble. Examples:

• "Les droits et obligations resultant de la presente convention determinent, compte tenu des circonstances, une position relative desparties au moment de la signature."

• "Les dispositions de la presente Convention ont ete arretees enfonction des donnees juridiques, fiscales et monetaires, economiques et financieres existant ala date de signature de la presenteConvention dans les pays ml sont situes les sieges sociaux duPreteur et de l'Emprunteur ou dans Ie pays tiers par l'intermediaire duque! des paiements sont effectues ainsi qu'en fonction desconditions economiques et financieres internationales a cettememe date."

• "In entering into this long term Contract the parties hereto agreethat it is impracticable to make provision for every contingencywhich may arise during the term thereof; and the parties herebyagree it to be their intention that this Contract shall operate


between them with fairness and without prejudice to the interestsof either."

The essence of hardship clauses is expressed in these preambles: thenotion of unforeseeability (third example), the chronologically relativecharacter of the position of the parties (first and second examples), thespirit inspiring the amendment of the contract, the emphasis being puteither on the balance of obligations (second example) or on fairness orequity (third example).

These concepts are not absent from hardship clauses, which do notinclude a preamble, since they normally appear either expressly or implicitly in the body of the clause. The use of a preamble helps explain the philosophy behind the clause, thereby facilitating its eventual application by athird party, whether arbitrator or expert. lO One should, however, take goodnote of the fact that these two examples of preambles already reveal twodifferent criteria that may assist in the amendment of the contract, an"objective" criterion (the balance of obligations) or a "subjective" criterion(fairness, equity).

2. Hypothesis

The first part of every hardship clause defines the situation in whichthe clause shall apply. First, it is a question of whether certain circumstances occur, and subsequently what consequences on the economics ofthe contract ensue from these circumstances. In order to clarify the position before proceeding to a more detailed examination, let us cite a simpleexample where these two aspects of the situation are clearly revealed:

"... si par suite de circonstances d'ordre economique ou commercialsurvenant apres la signature du contrat et en dehors des previsionsnormales des parties (circumstances) l'economie des rapports contractuels venait aetre modifiee au point de rendre prejudiciable pourl'une des parties l'execution de ses obligations (consequences) ..." [Theremainder describing the relevant procedure.]

(a) Circumstances. The clauses examined reveal a great variety of circumstances that have been taken into consideration. A few constant features are nevertheless evident, mainly concerning the ideas of change andunforeseeability and the external nature of these in relation to the controlof the parties.

1. Change in Initial Circumstances. Hardship clauses concern situationswhere the initial circumstances surrounding the contract undergo achange. This idea is expressed in many different ways:

10 Cf. supra, chapter 2, pp. 88-90.


• " Compte tenu de l'evolution des circonstances ... "• " in the event of a new situation ..."• " dans les cas mIla situation economique ou monetaire subirait

des modifications . . ."• "... au cas OU se produiraient des variations tres importantes dans

la conjoncture ou des modifications tres notables dans les conditionseconomiques ...

• "... Si par suite de circonstances ... survenant apres la signature ducontrat ..."

• " si les conditions du marche devenaient telles que ..."• " if there is the occurence of an intervening event or change of cir-

cumstances. ..."

The change of circumstances is of no effect unless it seriously affectsthe relations between the parties; this will become apparent in examiningthe consequences.

Sometimes, however, the clause requires that the change in circumstances itself be substantial. One of the examples cited above refers to variations tr-es imporlantes in the circumstances, or to modifications tres notables inthe economic situation. Another clause refers to circonstances extraordinaires.

2. Unforeseeable Change of Circumstances. A mere change of circumstances is not sufficient; the change of circumstances must also have beenunforeseeable at the time of the making of the contract. An evolution of circumstances, which was initially foreseeable (and whose consequences onthe relationship of the parties could be assessed at the outset) is coverednot by hardship clauses but by other types of clauses, for example, by reviewor index clauses. The very fact that the parties provide for a hardship clausenecessarily implies that they are aware of the possibility that the circumstances might be upset in the future. But they are not in a position to provide for the nature, scope or time of such a development. l1

The hardship clauses examined often take up this idea of unforeseeability. Examples:

• " des circonstances ... en dehors des previsions normales des parties "• " en cas de survenance d'evenements economiques imprevisibles "• " it is impracticable to make provision for every contingency which

mayarise ..."

Sometimes the hardship clause expressly refers to certain circumstances whose evolution is governed by another provision in the contract,so as to exclude them from the scope of the hardship clause:

11 Certain hardship clauses provide for the evolution of very precise circumstances,at least as far as their nature is concerned.


• "... En cas de survenance d'evenements economiques imprevisibles ou exclus par les previsions qu'ont admises acheteur etvendeur-(telles sont notamment les modifications de charges detoutes natures-autres que celles relevant de l'article 5-les hausses desmatieres premieres ou autres causes conduisant aune aggravationimportante des COlltS de fabrication) ..."

Some clauses limit themselves to requiring that the change in circumstances should be unforeseen:

"... des circonstances extraordinaires ou non privues . .."

Such a formula would appear to be dangerous, since the party whomerely lacked foresight has the benefit of re-considering the contract, bynot taking into consideration certain events whose occurrence was clearlyforeseeable.

Sometimes the criterion of an event beyond the control of the partiesis substituted for the criterion of unforeseeability:

• "... an intervening event or change of circumstances beyond saidparty's control when acting as a reasonable and prudent operator "

• "... toutes circonstances independantes de la volonte des parties "

This last clause specifies that:

"Sont independants de la volonte des parties au sens de cetteclause, les circonstances qui ne resultent d'une faute de la partiequi les invoque"

The two criteria of unforeseeability and being outside the control ofthe parties are not interchangeable. They cover two different situations thatshould, it seems, be applied in a cumulative way. Drafters of such clausesshould be aware of this.

Yet numerous clauses do not refer to either of these two criteria:

"... compte tenu de l'evolution des circonstances ..."

This gap would appear to be dangerous, since it greatly increases thepotential scope of the hardship clause.

3. VWzat Types of Circumstances Are Taken Into Consideration? The hardshipclauses considered show considerable variety in this respect.

(i) Broad Wording. The broadest wording can cover:

"Tous faits qui pourraient mettre en perilla bonne fin du marche."


The strikingly general nature of this phrase must be considered in thelight of the fact that this is a unilateral clause making one of the parties leseul juge de la question.

There is another example of a clause, which is hardly less far reachingin its scope:

"If for any bona fide cause the revenue accruing to you for this transaction is insufficient to meet the costs ..."

The following clause of this kind first sets out a list of relatively specificevents:

"Toutes difficultes ... relatives a l'obtention de devises, a desmesures de politique commerciale, au contingentement, a lamanipulation monetaire."

However, it ends the list with the word "etc.," thus extending the scopeof the clause to infinity. Such a clause is also one whose application is leftto the unilateral discretion of one of the parties.

The majority of clauses examined by the Group, however, cover theoccurrence of better defined circumstances, either where they are qualifiedin a general manner, or where it is a question of specific circumstances, orwhere the clause employs a combination of these last two.

(ii) General Circumstances. The generally worded clauses usually cover theevolution of economic, commercial or monetary circumstances. Examples:

• "Au cas OU se produiraient des variations tres importantes dans laconjonctur-e ou des modifications tres notables dans les conditionseconomiques ..."

• "... en cas de bouleversement du systeme monetaire internationalactuel . .."

• "en cas de modification d'ordre monetaire "• " monetary events and/or alterations "• " dans Ie cas OU la situation economique ou monetaire subirait des

modifications ..."• "... par suite de circonstances d'ordre economique ou commercial . .."

The clause sometimes also embraces a change in political circumstances,especially in the case of contracts concluded with partners from a countryjudged to be politically unstable:

• "... dans Ie cas de la survenance d'evenements politiques exterieursou interieurs ..."

• "dans Ie cas 011 un evenement graveeconomique ou financier . .."


de caractere politque,

Here are two slightly more specific wordings:

• "la survenance d'evenements susceptibles de perturber Ie fonctionnement normal des institutions financieres (du pays X) ou detout fait pouvant entraver Ie deroulement ponctuel des paiementsexterieurs (du pays X) ..."

• "Les Parties reconnaissent que, dans Ie cadre des restructurationsen cours de l'industrie europeenne de ... , elles peuvent etreamenees a accepter des exceptions aux regles qui precedent,qu'elles s'engagent anegocier de bonne foi."

Some clauses provide that the events in question can be internal orexternal, national or international.

Economic, financial, commercial and political circumstances are probably those whose upsetting would be most likely to affect the balance of thecontract. The fundamental alteration of the legal circumstances prevailing atthe time of the conclusion of the contract can also be taken into account. Achange in legislation can affect significantly the performance of current contracts. The phenomenon was already examined when discussing force majeureclauses,12 where it was shown that contractual stipulations often cover, at thesame time, situations where the legal modification renders performanceimpossible and those where performance is simply made more onerous. Weshall quote again a particularly sophisticated clause of this kind:

"A "Change in Law" means:

"(a) the adoption, promulgation, modification, repeal or re-interpretation after the effective Date by any Governmental Entity ofany Law of (country), including, without limitation, a decision of aGovernmental Entity after the Effective Date, which (or the effectsof which) amends or conflicts with the Laws of (country) established or in effect as of the Effective Date, or

"(b) the imposition after the Effective Date by a GovernmentalEntity of any term or condition in connection with the issuance,renewal, extension, replacement or modification of any Consent,

that in either case contributes to a Change in Costs, requires aStatutory Modification, renders the Financing Documents unlaw-

12 Cf. SU!JTfL, Chapter 8, pp. 411-412. This passage also makes the comparison withso-called "stabilization clauses."


ful, unenforcable, invalid or void or establishes requirements for,or imposes restrictions on the construction, operation, maintenance, financing, insurance or ownership of the Complex or theCompany, or the prices payable under the Agreement, that aremore restrictive or more onerous than the most restrictive or mostonerous requirements (i) in effect as of the Effective Date, (ii)specified in any applications, or other documents filed in connection with such applications, for any Consent filed by the Companyon or before the Commercial Operations Date, so long as suchrequirements are consistent with the Laws of (country) in effect asof the Effective Date or (iii) agreed to by the Company in anyagreement in the Security Package."

Approaching the problem of the definition of the hypothesis fromanother angle, some clauses do not make any more reference, even implicitly, to the circumstances that are capable of being modified. They limitsuch reference to the case where:

"... l'execution de l'une ou de l'autre clause de la convention provoqueraitune nlpture appreciable (of the parties' relative position) ..."

or to the case where:

"... a l'experience, il s'avererait qu'une clause de la conventionprovoque une rupture appreciable (of this position) ..."

Such wording gives the hardship clause an extremely wide scope, probably a scope that is both too broad and too imprecise.

(iii) Specific Circumstances. By way of contrast, many of the examinedclauses referred to events which were much more specific, often particular to thesector in question, or to one of the parties. Examples:

• "... les modifications des charges de toutes natures, les hausses desmatien:s premieres ou autres causes conduisant a une aggravationimportante des couts de fabrication ..."

• "In the event that during the term of this Agreement the producerbasis for. . . is discontinued or ceases to be the n:presentative basis inEurope for the purchase or sale of ..."

• "Si la production d'acierprovenant de fontes hematites atteint 20%de la production totale de l'acierie de ..."

• "... a novel economically available source ofproducts . .."• "... environmental prescriptions forcing the designated receiving

smelter to undertake new endeavours for providing, eliminatingand reducing certain elements in its production process or itsemissions ..."


• "... en cas d'application de nouveaux droits d' importation ou d'exportation . .."

• "... discriminatory Governmental action or regulations on differtmtial customs duties . .."

• "Toutes difficultes . .. (concerning) l'obtention de devises, it des mesures depolitique commerciale, au contingentement, ala manipulation monetairr . ..13

• "Les dispositions de la presente Convention ont ete arretees enfonction des donnees juridiques, fiscales et monetaires, economiques et financieres existant a la date de signature de la presenteConvention dans les pays OU sont situes les sieges sociaux duPreteur et de l'Emprunteur ou dans Ie pays tiers par l'intermediaire duquel des paiements sont effectues ainsi qu'en fonction desconditions economiques et financieres internationales a cetteIneme date."

• "... changes in monetary values . .."• "dans les cas ou ... Ie Gouvernement (of country Z) prendait des

mesures faisant obstacle a l'execution de la presente convention,decreterait un momtoire general ou introduirait une demande de consolidation de ses dettes exterieures, ou si un retard generalise venait aetre constate dans les transferts en provenance (from country Z)."

• " dans Ie cas mI ... la B.IRD. vendmit it suspendrr son concour-s it . .."• " changement dans la situation de l'acheteur, tel que deces, inca-

pacite, faillite, suspension de paiement, cessation de commerce,modification aux statuts, etc. "

• "If the long term need of (product) of the purchaser woulddrastically be decreased by such a volume that this Agreementwould be financially unacceptable for the parties...."

It is clear that to be specific is not always the same as to be precise, andto establish the existence of given circumstances (e.g., changes in monetary value) may create real problems.

Here is a clause that brings much more detail to the description of theoverturning of circumstances, qualified as "market disruption":

"Market Disruption Event

"11.1 A 'Market Disruption Event' shall occur when:

"11.1.1 the Price Source has not been published or is otherwise notannounced on any Price Source Business Day during the relevantDelivery Month; or

13 In this case, the clause concluded with the word "etc."-already mentioned aboveunder (i).


"11.1.2 the Price Source has ceased to exist or is otherwise unavailable; or

"11.1.3 a change has taken place in the formula for or the methodof calculating the closing price of the underlying Commodity Typein respect of which the Price Source is calculated, or a change hastaken place in the content, composition or constitution of theunderlying Commodity Type; or

"11.1.4 there exists a suspension or material limitation of tradingeither in futures contracts relating to the Price source traded ona Relevant Exchange, or on a Relevant Exchange in contractsdirectly relating to the commodity in respect of which the PriceSource is calculated.

"11.2 Notwithstanding the foregoing a limitation on net hours andnumber of days of trading will not constitute a Market DisruptionEvent if it results from an announced change in the regular business hours of a Relevant Exchange, but a limitation on tradingimposed during the course of a day by reason of movements inprice otherwise exceeding levels permitted by a Relevant Exchangewill constitute a Market Disruption Event.

"11.3 For the avoidance of doubt where the Price Source is a quotation of Platts, Petroleum similar assessment service, there shallbe deemed to be no Relevant Exchange."

(iv) Specific Circumstances and "Imprevision." The Group consideredthe nature of a clause referring to such events sometimes so precise and itsrelationship, in French and Belgian law, with the theory of imprivison.

Imprioison only concerns the occurrence of unforeseeable events: is thisalways the case with such specific clauses? Clearly one must distinguishbetween foreseeing the possibility of the occurrence of an event and foreseeing its coming into existence. The discovery at a future date of a newsource of supply can be seen by the parties as a possibility, but it does notmean that this discovery was foreseeable initially. Moreover, imprevision alsoconcerns the consequences that the occurrence of the event might have onthe contract. If, without straining the imagination, the parties are in a position to conclude at the outset that the eventual discovery of a new sourceof supply might pose a risk to the contract, they are certainly not in a position to make a pre-estimate of such consequences. The distinctive characteristic of the hardship clause thus clearly re-appears when the partiesprovide for a procedure to re-negotiate the contract, being quite unable toagree on a formula for automatic amendment at the outset.


To provide for the proportional adaptation of the price in the event ofthe alteration of the relationship between two currencies or in the event ofa rise in the cost of raw materials, is to have a currency exchange clause oran index clause. Where the parties agree that under the same circumstances, they shall meet to examine the future of the contract, they stipulatea hardship clause. In such a situation, the parties consider that, in view ofthe possible extent of the feared fluctuations and the characteristics of thecontract, they cannot solely rely on an automatic adaptation mechanism.

It is therefore suggested that a reference to a specific event does notnecessarily remove the unforeseeable nature of this event and that aboveall, the hardship situation is marked by the uncertainty existing at the outset as to the possible consequences to the contract from the occurrence ofsuch an event. This was not the unanimous opinion of the Group, certainmembers believing that such a specific hardship clause bears little relationship to the theory of imprevision. The Group has, in any event, agreedon the need to rid the subject of all dogmatism. Contracts, in practice, dealwith an infinite variety of clauses. If it were useful, for reference purposes,to try and establish the categories and characteristics of such clauses, itwould be unwise to disregard the whole range of hybrid and intermediarysituations.

(v) Combination of Specific and General Circumstances. One frequently finds a combination of the two ways of determining the circumstances: first, the use of general wording, followed by a series of examplesof specific circumstances. Examples:

• "En cas de survenace d'koenements economiques imprevisibles ouexclus par les previsions qu'ont admises acheteur et vendeur (teZZessont notamment les modifications de charges de toutes natures ... , leshausses des matieres premieres, ou autres causes conduisant auneaggravation importante des COlltS de fabrication) ..."

• "If owing to changed circumstances such as changes in monetary values or discriminatory Governmental action or regulations or differential customs duties ..."

• "Dans Ie cas de modifications importantes pouvant affecter Ie systememonetaire international, modifications notamment susceptibles d'entrainer des distorsions serieuses dans les relations entre les monnaies auxquelles il est fait reference dans ce contrat ..."

• "En cas de survenance d 'evenements imprivisibles ... II en sera ainsinotamment en cas d'application de nouveaux droits d'exportationou d'importation et en cas de modification de droit ou de fait dansles parites actuelles du dollar USA, du franc beIge et du florin"

• "If in the course of the performance of this contract unfairness orprejudice or obvious hardship to either party is expected or dis-


closed ... (the description of the relevant procedure follows)It is understood that the foregoing includes inter alia the following:1) Monetary events and/or alterations; 2) Environmental prescriptions ..."

• "... in the event of a new situation, e.g. the possibility of an acquisition in the market sector covered by this Agreement. ..."

This type of wording seems to have its advantages. It avoids possible discussions as to the inclusion of certain specific circumstances in the areacovered by the general formula, while avoiding the inconvenience of a limited series of specific circumstances. 14

(vi) Excluded Circumstances. A few clauses take care to excludeexpressly the occurrence of certain specified ciTcumstances from the application of the hardship clause. Thus:

• "Price control by the Government of the state of the relevant buyeraffecting the price of ... in the market shall not be considered toconstitute substantial hardship."

• "... the occurrence of any event beyond the reasonable control ofeither the Ministry or the Concession Company, other than anevent of Force Majeure and other than any 'material adverse governmental action,' as such term is defined in Clause 18.4."

This exclusion may be implicit when it results from the application tocertain fixed events of other provisions of the contract. Example:

"... notwithstanding the effect of the other relieving or adjustingprovisions of this Agreement."

It is worth recalling that the events covered by the hardship clause formula are only covered when they give rise to certain defined consequenceson the economic basis of the contract.

C. Consequences

A hardship situation exists when the events in question result in theupsetting of the balance of the contract. Here again, the clauses examinedvary greatly in their wording.

1. Prejudice

The simplest way of describing the consequences is to state that theeconomic basis of the contract is altered in such a way as to prt'judice one ofthe paTties. Examples:

11 A similar discussion concerns force majeure clauses: cf. supra, Chapter 8, pp. 413-414.


• "si ... Ie preteur etait soumis a toute mesure monetaire ou financiere entrainant un surcroit de charge relative a sa participation aucredit ..."

• "... si, par suite de circonstances ... , l'economie des rapportscontractuels venait ase trouver modifiee au point de rendre prijudiciable pour l'une des parties l'execution de ses obligations...."

In another clause the wording is reversed, but the sense is the same asabove:

"... la presente convention est etablie entre deux partenaires quine cherchent pas aprofiter d'un avantage quelconque qui serait duades circonstances extraordinaires ou non prevues."

These unqualified clauses give the hardship clause a scope which appearsdangerously wide.

2. Objective Criteria

In general, the clauses examined do not simply require some form ofdamage; they also require that the resulting imbalance be considerable.Examples:

• " une rupture appriciable (in the parties' relative position)• " des charges sensiblement plus lourdes que celles prevues ala sig-

nature du present contrat ..."• " substantial economic hardship . .. "• " substantial and disproportionate prejudice to either party ..."• " pour effet que l'une (of the parties) retire du present contrat

des avantages hOTS de proportion avec ses obligations ..."• "un prejudice materiel exagb-e "• "obvious hardship to either party "• "lorsque ces evenements ont pour effet de bouleveTSer les bases

economiques de contrat au prejudice de l'une ou de l'autre desparties ..."

• "... pour effet de bouleverser l'economie du contrat ..."• "si les avantages de la presente convention ont ete bouleverses de

fa<,;on fondamentale ..."

Other clauses seem to express a similar idea but in less explicit terms:

• "... telles que certaines dispositons de la presente conventiondeviendraient inapplicables dans la forme prevue . .."

• "... empechant l'execution (de la convention) dans des conditionsnormales. . . ." 15

15 These last clauses borrow the wording ofJrm:e majeure clauses that, as a rule, cover


All the above clauses have the advantage of avoiding the re-appraisal ofthe contract on the simple occurrence of any modification of the advantages which one party hoped to obtain. As far as consequences are concerned, they confirm the exceptional nature of the working of hardshipclauses. But the general nature of the criteria chosen (substantial, obvious,etc.) runs the risk of raising serious problems of interpretation when oneparty invokes the clause.

3. Subjective Criteria

Some clauses add or substitute subjective criteria for the objective criteria that have just been discussed in order to qualifY the consequences of theevents in question have on the contract:

• "... telles que l'application de la presente convention aboutirait ades consequences inequitables pour l'une ou l'autre des parties ..."

• "... imposent al'une des parties une charge inequitable, decoulantdu present protocole ..."

• "undue hardship to either party ..."• "undue hardship or inequity . .."• "les parties declarent que leur intention est que cette convention

se deroule dans un esprit d'equite et sans qu'un prejudice materielexagere puisse en resulter, ni pour Ie vendeur, ni pour l'acheteur.S'il advenait qu'une telle situation prejudiciable soit acraindre ouvienne ase realiser ... "16

• "... unfairness or substantial and disproportionate prejudice to theinterests of either ..."

These references to equity and fairness were the subject of lively debateamong members of the Group, some of them holding that they confer adangerous imprecision on the clause, others considering such criteria tobe normal in commercial law and practice. As the same concepts re-appearwith respect to the procedure for amendment of the contract, a moredetailed discussion will be presented later. 17

4. SpecmcConsequences

A few of the clauses examined refer to more specific consequences:

• "Si les conditions du marche devenaient telles que Ie prix de ventese revelait inferieur a... (figures)"

those situations in which the performance of the contract becomes completely impossible. Cf. sU!Jr(J" Chapter 8.

Hi It is worth noting the technique of referring to a preamble used in this clause.

17 Cf. infra, pp. 477-480.


• ... pour effet de rencherir Ie COllt des ressources en devises ou descredits ou de riduire Ie montant en principal ou en interets apercevoir par la banque ..."

• "which place said party in the situation that ... all annual costs . ..associated with or related to (... ) which is the subject of thisAgreement exceed the annual pTOceeds derived from the sale of said(... ) ..."

• "evenements ... de nature aentrainer un retrait de garantie de l'OfficeNational du Ducroin: . .. "

Those members of the group against the "consequences" being qualified in too general terms showed their preference for these latter clauses.The parties should make every endeavor to decide at the outset, and as precisely as possible, the type of economic disturbance of the contract capableof bringing about its amendment. The clauses, which have just beenreferred to, are certainly not all entirely satisfactory: some of them containa certain degree of imprecision. But as examples, they may serve to assistin the drafting of other wordings, which would make the implementationof hardship clauses less problematic. The Group suggests that special attention be paid to the study of criteria, which should be as objective as possible as far as consequences are concerned. This need is most urgent ashardship clauses often already contain a considerable element of uncertainty about the events in question. IS

D. Establishing the Existence of the Relevant Situation

We will look at the procedure to be applied when the hardship situation occurs. This procedure often provides for re-negotiation of the contract. First of all, establishing that the situation in question exists, can initself present considerable problems, particularly in light of the imprecisenature of the criteria used.

It is certainly possible to let one party decide unilaterally:

"Un evenement ou un changement qui, selon l'appreciation du preteur, a ou pourrait / est susceptible d'avoir un effet defavorableimportant sur...."

Such appraisal must certainly be exercised in good faith, but the riskof abuse cannot be underestimated. It is preferable to set up an independent procedure for establishing the existence of hardship. Examples:

• "A defaut d'accord des parties sur Ie principe de la revision, laquestion est, a l'initiative de la partie la plus diligente, soumise a

18 Cf. supra, pp. 463-470.


l'arbitrage ... Les arbitres decident s'il y a lieu arevision de la oudes clauses incriminees."

• "... the (prejudiced) party ... may by notice request the other fora meeting to determine if said occurrence has happened If theseller and the buyer have not agreed ... within sixty days eitherparty may require the matter to be submitted for arbitration ...The arbitrators shall determine whether the aforesaid occurencehas happened ..."

• "A defaut d'acord, il est convenu que chacune des parties designera un expert economiste assiste eventuellement d'un expertfinancier que se reuniront pour examiner si les avantages de lapresente convention ont ete bouleverses de fa<;,:on fondamentalesuite aun evenement imprevisible."

The nature of the role played in such circumstances by the "arbitrator"or the "expert" used to pose severe problems. We will return to these whenconsidering the procedure for the amendment of the contract.

The three clauses quoted suggest, however, the existence of anotherfundamental question, the solution of which largely determines the efficiency of hardship clauses. At such time as one of the parties intends toinvoke the clause, there is the risk that the other contracting party benefiting from advantages, which correspond to the damage suffered by itspartner, will seek to escape from the re-negotiation of the contract. Thetemptation to contest the existence of the relevant situation can be greatand is indeed encouraged by the frequently imprecise nature of the relevant criteria. Yet, this problem rarely seems to be appreciated by those whodraft these clauses. At least, none of the clauses examined, other than thethree examples just quoted, made reference to this problem.

In the absence of any special procedure being expressly provided for,the unjustified refusal of one of the parties to admit the existence of therelevant situation (refusal even to examine the circumstances in questionand their consequences, bad faith in carrying out this examination) maylead to involving the contractual responsibility of the party in question. InFrench law, for example, the wronged contracting party could try to invokeexceptio non adimpleti contractus in order to provisionally withhold performance of its own obligations. 19 It would also have recourse to the courts toobtain either specific performance (which could entail the court considering the existence of the relevant situation) or the termination of the contract and the award of damages where applicable.20 However, if the contract

19 But are the obligations in question sufficiently related? On this requirement inFrench law, d. J. Ghestin, L'exception d'inexecution, in Les sanclions de l'inexecution desobligations wntrar:LLlelles, M. Fontaine & G. Viney (eds.), Brussels and Paris, 2001, pp. 8-13.

20 But how are the damages to be calculated? Is it conceivable that the judge might


contains a general arbitration clause, this would seem to be applicable inthis particular case; the refusal to admit the existence of the relevant situation would be assessed by the arbitrators.

The numerous uncertainties associated with relying on the existinglegal procedure and in view of the refusal to apply such a delicate clause,should encourage the parties to be more aware of the problem and providefor specific solutions to it in the drafting of hardship clauses. One could,for example, rely entirely on the fairness of the other contracting party byproviding that in the absence of amicable agreement on the existence ofthe hardship situation, no further recourse would be possible and the contract would subsist on the initial terms. But this solution can prove economically unbearable. Another possibility would be to permit, in theabsence of agreement on the relevant situation, the unilateral terminationof the contract subject to prior notification. A third solution, perhaps thebest, is offered by the three clauses quoted above which provide for a special procedure in this situation, namely recourse to arbitration or anexpert's opinion.

E. Grace Period

One special provision examined provides for a grace period betweenthe conclusion of the contract and the first moment when the hardshipclause can be invoked and also a restriction as to the frequency of recourseto such a clause:

"This section may not be invoked by seller or buyer prior to thefirst day of October 20 ... , and no more often than once everytwo years."

It is once again a question of reducing the element of uncertaintywhich a hardship clause introduces into a contract.

F. Procedure

When hardship is verified, the clause provides for a procedure to be followed. In the first place, the party experiencing hardship circumstances mustgive notice to the other party. The contract will then, in principle, beamended, usually under the guidance of certain criteria. If the parties cometo disagree at this stage, the clause sometimes provides that the contract willbe terminated, or that its re-adaptation will be entrusted to arbitrators.

refer to the hypothetical results of the renegotiation which has not yet taken place?Camp. supra Chapter 1, pp. 50-53, concerning letters of intent.


1. Notice

Here are three examples of clauses providing for notification of theoccurrence of hardship circumstances:

• "That Party may notify the other in writing that it wishes to meetand review the conditions of the Agreement in the light of thechanged business conditions."

• "If HARDSHIP occurs, A shall notify B thereof within thirty (30)days of becoming aware thereof together with a description of theevent and its consequences for A."

• "In case of an inequitable economic hardship, the party proposinga change or negotiations shall give notice thereof to the otherparty, setting forth a proposal for resolving the inequity."

A well-drafted clause should set a time limit, as well as the form (e.g.,in writing) and contents (a description of the circumstances and theireffects, possibly already a proposal for readjusting the contract) of therequired notice.

2. Re-Adaptation of the Contract

The first step if for the parties is to try and re-adapt the contractbetween themselves. For example:

• " cette ou ces clauses seront revues "• " n:voides modalites d'application "• " les parties procederaient aune revision du contrat ..."• " either party shall have the right to ask for renegociations."• " ase mettre d'accord sur une adaptation du prix ..."• " the (prejudiced) party ... may by notice request the other for

a meeting ... to agree upon what, if any, adjustment in the pricethen in force under this Agreement and/or other terms and conditions thereof is justified ..."

• "... les parties se consulteront aux fins de trouver en commun desajustements equitables acet accord."

• "... that the party shall have the right to require the other party toparticipate in a joint examination of the position with a view todetermining whether rtrvision or modification of the provisionsthereof is required, and if so, what revision or modification wouldbe appropriate and equitable in the circumstances."

Some wordings do not limit the aim of a discussion to the mere reviewing of the contract.

• "... the parties will use their best endeavours to agree such an actionas may be necessary . .. "


• "... les deux contractants ... se concerteraient ... pour dr5termineren commun Ie moyen de remedier promptement et adequatement acette situation prejudicable et, les cas echeant, pour apporter aucontrat les amendements necessaires."

• "... les parties conviennent de rechercher en commun les moyensaptes it r-emedier (the damaging situation) ..."

The following clause, on the contrary, appears to be more restrictive.It narrows at the outset the possible types of amendments:

"The Ministry and the Concession Company shall consult withinten (10) days after notice with a view to reaching a mutually satisfactory resolution of the situation, which could, if the Parties doagree, result in either the modification of then existing toll ratesand/or an extension of any applicable deadline for the ConcessionCompany to meet its obligations under the Concession Contractand/or reduction in amounts which would otherwise be payableto the Ministry under the Concession Contract. These shall be theonly type of remedies available for events arising under this Clause."

Finally we shall recall a clause already quoted above, where the noticeof hardship circumstances must already contain a proposal for readaptation of the contract:

"In case of an inequitable economic hardship, the party proposinga change or negotiations shall give notice thereof to the otherparty, setting forth a proposal for resolving the inequity."

3. Objective, Subjective and Mixed Criteria

In order to impose certain boundaries to the amendment of the contract, most of the clauses received propose certain criteria to guide the renegotiation. Here again, as with the qualification of a fundamental changein the contract, there are two orientations: some clauses apply objective criteria, which aim in general to re-establish the original balance between therespective obligations of the parties, but most wordings use general limitswith subjective criteria, referring to fairness and equity. Both types of criteria are sometimes combined.

Objective criteria:

"... de fa<;;:on a replacer les parties dans une position d 'equilibrecomparable it celle qui existait au moment de la conclusion du presentcontrat."


Subjective criteria:

• "... equitablement dans l'esprit d'objectivite et de loyaute qui est ala basedes relations existant entre les parties ..."

• " afin que tout se passe en parfaite loyaute reciproque . .."• " dans le meme esprit que celui qui a preside a la conclusion des

presentes ..."• " in fairness to the parties ..."• " to come to a mutually satisfactory agreement ..."• " des ajustements equitables . .."• " appropriate and equitable in the circumstances ..."• " such action as may be appropriate to abate such unfairness or

undue hardship . .."• "... a reasonable agreement ... acceptable to both parties..."

The following wording could probably be construed as a subjectivecriterium:

• "... pour but d'eviter>que l'une des parties ne tire Profit au detrimentde l'autre partie de la nouvelle situation ainsi creee ..."

Combined criteria:

• "... afin de preverser l'esprit de bonne foi qui prevalait au momentde la signature du contrat et qu' ainsi celui-ci puisse s'executer oucontinuer as'executer sans prejudice disproportionne pour l'une oul'autre des parties ..."

• "... with fairness and without substantial and disproportionate prejudiceto the interest of the either ..."

• "... dans Ie meme esprit de bonne foi que celui qui a preside alaconclusion de la presente convention... de fa<;;:on a replacer lesparties dans une position d' equilibre comparable a celle qui existait aumoment de la conclusion de la presente convention...."

It is clearly useful to indicate from the start the criteria that will guidethe re-negotiation, which can take many directions, the final result beingthe adequate adjustment of the parties' respective obligations. It seems thatthe general preference of the members of the Group would go to theobjective criterion of re-establishing a balance fairly close to the originalone. On the other hand, two conflicting opinions were expressed asregards the use of subjective criteria, and, in particular, that of equity.Without pretending to be conclusive, we will report here the principal considerations put forward during the lively debate which followed.


Against the equity criterion:

1. It is imprecise, uncertain, and removes all security from legalrelations.

2. It is superfluous, if it only means that each must receive its due.3. It is dangerous because, in an international contract, each party's

idea of equity can be infinitely variable.4. It has a moral coloration, which allows any kind of judgment

(e.g., is it moral to comply with or to disregard a clause excluding liability?).

5. If the application of this criterion is entrusted to an arbitrator, thereis a risk that he will interpret this as authorizing him to look for asolution outside the contract, outside the law. In order to avoid "government by judges," all the elements required for the arbitrator toform his opinion must be provided in the contract itself.

Those in favor of this position recommend that reference be made asfar as possible to the objective criterion of the original balance of the contractual obligations, or if possible, to even more precise criteria (levels orratios of prices, of costs, etc.).

For the equity criter"ion:

1. This criterion is a usual standard of contract law of certain countries (see Article 1135 of the French and Belgian Civil Code).

2. Its moral coloration must not be rejected. Businessmen are notinsensitive to such notions (equity, good faith, fairness).

3. The content of the notion of equity is not entirely imprecise whenparties have the same homogenous background.

4. When the circumstances in which the contract was concluded havebeen radically changed, the contract does not provide any longerthe criteria required; external criteria must then be resorted to, inorder to indicate the spirit in which the revision must be made.

5. Even objective criteria often include subjective judgments (e.g.,"excessive unbalance between the respective obligations"; ''fundamental upsetting of the initial contractual equilibrium").

6. From a strategic point of view, it is perhaps not advisable duringthe negotiations prior to the conclusion of the contract itself, to tryand foresee with too much precision the adaptations that mightbecome necessary in the future.

7. Some objective criteria might be indiscreet, for example, if a pricestructure must be revealed.

To the above elements drawn from the Group's discussions, one can addthat standards, which may appear to be subjective in certain jurisdictions


may, on the contrary, be considered objective under other legal systems.For instance, in German, Swiss or Dutch law, notions such as "goodfaith," TTeu und Glauben or "fairness" refer to objective norms of behavior, to the attitude that can be expected from a reasonable party underthe same circumstances.

4. Disagreement Over the Content of the Revision

The majority of hardship clauses examined fail to provide any guidingprinciple in case the parties fail to agree on the revision of the contract.Certain solutions can be found in the general law, but their applicationseems difficult.

Several clauses, however, have foreseen the possibility of such a disagreement and have provided, in this case, either the possibility of terminating the contract (or of suspending its application), or resorting toarbitration.

a. Lack of Specific Provision

If no provisions have been made in the contract, what rules would beapplicable in case of disagreement between the parties over the revision ofthe contract? The problem is similar to the one encountered above concerning the disagreement as to the existence of the relevant situation. 21

In the first place, there is certainly a contractual obligation to re-negotiate, and the party, who would try to avoid it although the hardship circumstances have evidently materialized, would incur its contractual liabilityunder the applicable law.

The problem is much more delicate when the negotiation is alreadyunderway, but the parties cannot reach an agreement. In itself, the obligation to re-negotiate does not entail the obligation to reach an agreement.

This is clearly stated in the following clause:

"The Parties shall make good faith efforts to resolve the economicdifficulties on mutually acceptable terms however there shall be noobligation hereunder for the Parties to reach agreement hereon."

Such a clause does not solve everything, as the conduct of each negotiator remains to be gauged. The absence of an obligation to reach anagreement does not equal the absence of any duty to behave appropriatelyduring the re-negotiation,22 in reference to the criteria provided by the

21 Cf. supra, pp. 473-475.

22 Compo supra, Chapter 1, concerning letters of intent and the parties' obligationsin the course of the initial negotiation of the contract.


clause itself (in connection with these, the difficulties to which subjectivecriteria give rise have been examined). Under French law, for example, theobligation to participate in negotiations towards a new agreement must be,it seems, only an obligation de moyens; a party's liability will be incurred onlyowing to a proven fault in the re-negotiation. If one of the negotiators' liability is incurred, the other party will have at its disposal the usual remediesgranted by the general law (legal action to terminate the contract, damages), but it is readily obvious that these will be inadequate in numeroussituations where hardship clauses may apply (long-term supply agreements,contracts that, because of their contents, "condemn" the contracting parties to reach an understanding, etc.). If, on the contrary, it turns out thatthe failure of the negotiations cannot be attributed to the fault of eitherparty (both parties remaining in perfect good faith in their respective positions), there is no other solution than keeping the contract as it is, but isthis economically feasible?

In view of all these uncertainties, it is recommended to provide in thehardship clause a procedure that will apply in case the parties cannot reachan amicable agreement concerning the revision of the contract.

b. Termination of the Contract

In practice one of the solutions consists in the possible termination ofthe contract. For example:

• "Si (les parties) ne parviennent pas a un accord dans un delairaisonnable, chacune d'elles pourra invoquer la resiliation du contratou de la partie non livree de la commande, Ie tout sans indemnite."23

• "A defaut d'accord des parties dans un delai de... jours acompterde la demande d'adaptation, chacune des parties aura la fandte demettre fin au contrat, sans indemnite, moyennant un preavis de ...jours, anotifier par lettre recommandee. Pendant ce preavis, lesfournitures se poursuivront sans modification des conditions contractuelles. "24

In the second clause, several useful specifications are present, whichare lacking in the first one: a definite period of time is allowed for the conclusion of the negotiation, a requirement of advance notice, the form andduration of such notice and to the fate of the contract during the periodof notice; this last point can be phrased in a broader fashion:

23 What would be the consequence of such a clause for coverage of the risks priorto delivery in connection with export credit insurance?

21 The power to terminate the contract is reserved here to the party who asked forthe application of a hardship clause, but the hardship clause itself is not unilateral; eachparty has the right to avail itself of it. Some examples of unilateral clauses will be examined infra, p. 486.


"If any such notice of termination is given, all terms and conditionsof this Contract shall remain the same as these in effect prior tothe original notice of hardship until such termination becomeseffective."

The following examples reserve the right of terminating the contractto only one of the parties:

• "If the parties fail to reach agreement within 60 days of the delivery of such notice, the party suffering the inequitable hardshipmay terminate the Contract, effective twelve (12) months after thedate of the original notice of hardship by giving a notice of termination within five days of the end of said 60-day period ..."

• "A defaut d'accord des parties sur telle adaptation dans un delaide trente jours de la demande d'adaptation, la partie qui aurainvoque la clause aura Ie droit de mettre fin au contrat sans preavisni indemnite. Elle devra user de cette faculte dans un delai supplementaire de trente jours, faute de quoi Ie contrat s'executerasans modification aucune des conditions contractuelles."

An interesting aspect of this last clause is the provision whereby thecontractual relations will continue without change if termination is notrequested, even though the renegotiation fails.

c. Suspension of the Contract

One of the clauses received provides for a different system. If there isdisagreement about the new arrangement, the contract is suspended during a certain period at the end of which, if the hardship circumstances arestill present, each party has the power to terminate the contract:

"If ... the parties shall fail to agree within a reasonable time not toexceed ... days, this Agreement shall be suspended for a maximumof ... months on the written request of either party. Should thecause of such unfairness or undue hardship remain unchangedafter this period of suspension, then either party shall be entitledto cancel this Agreement forthwith on written notice without liability for damages."

This system is interesting because, here, the parties think it is conceivable from an economic point of view that the performance of their respective engagements should be interrupted for several months, pendingresumption or final termination.


d. Intervention of Third Parties

Some of the clauses provided that, in case of disagreement between theparties concerning the re-adaptation of the contract, the problem will besubmitted to the judgment of third parties, arbitrators or experts. It shouldbe borne in mind that some clauses already provided the possibility of suchan intervention in case of disagreement relating to the materialization ofhardship circumstances.

(a) Conditions. In the first place, the conditions under which this procedure is activated must be defined:

• "A defaut d'accord des parties sur les modifictions aapporter ..."• "Au cas ou les parties ne parviendraient pas atrouver elles-memes

une solution a leurs difficultes ..."• "Si les parties ne parvenaient pas as'entendre ..."• "Failing which such agreement ..."

As was the case above regarding the power to terminate, some clausesallow a certain time for negotiations to be conducted before arbitrationtakes place:

• "If the parties have not agreed a mutually acceptable solutionwithin sixty days after the notice requesting a meeting ..."

• "Si aucun n'etait intervenu dans un deIai de soixante jours acompter de la demande de revision ..."

(b) Qualifications of Intervening Third Parties. It is then provided thatthe decision about the contract will be submitted to one or several thirdparties referred to by various names:

• "... la question est ... soumise a l'arbitrage . .. "• "... (the modifications) ... seraient arretees par l 'arbitre ou les

arbitres . .."

• " elles feraient appel a l'arbitrage . .."• " either party may request the matter to be submitted for

arbitration . . ."

• "... the matter may be referred by either party for determinationby experts . . ."

• " (les parties) s'en remettraient ala decision d'un conciliateur "• " the matter shall be referred for decision to three referees All

such referees shall be deemed to be acting as experts and not asarbitrators."

As the last clause quoted suggests, what could be involved here is farmore thanjust a question of names. We shall deal with this later on and we


shall examine, for the moment, the various aspects of intervention by athird party (or parties). 25

(c) Designation of Third Parties. The third party (or parties) are designated, in general, according to the procedure described in the generalarbitration clause of the contract, to which reference is made:

"... l'arbitre ou les arbitres dont la designation est prevue al'article 10 ..."

But a particular mode of designation can also be provided:

• " un conciliateur unique adesigner de commun accord ..."• " experts to be appointed in the manner set out in Article XVIII

hereof save that the appointment of the third experts referred toin Clause 1 (c) of that Article shall in any event be made by ..."

• "... three referees who shall be persons fitted by the possession ofexpert knowledge for such decision. Each of the parties here toshall be entitled to appoint one referee and the third one shall benominated by mutual agreement between the parties or failingsuch agreement by the President for the time being of the International Chamber of Commerce."

(d) Mission. What is the mission of this third party (or third parties)? Thisis a crucial point. This mission is sometimes implicitly deterrnined by referringto the object of the renegotiation attempted by the parties themselves:

• "... les deux contractants, al'initiative de la partie prejudiciee, seconcerteraient, dans un esprit de comprehension et d'equite,pour determiner en commun Ie moyen de remedier promptement et adequatement a cette situation prejudiciable et, Ie casecheant, pour apporter au contrat les amendements necessaires.Au cas ollies parties ne parviendraient pas atrouver elles-memesune solution a leurs difficultes, elles feraient appel a l'arbitrageprevu au contrat."

Sometimes, the clauses define in a more precise way the mission of thethird party:

• "Les arbitres, apres avoir entendu les parties, peuvent, soit modifierd'autorite les clauses litigieuses dans la mesure necessaire pourretablir la position relative des parties, soit resoudre la convention."

• "The arbitrators shall determine ... what adjustment, if any, in thesaid price or in the other terms and conditions should be made forthe purposes of paragraph (a) ..."

25 Cf.in/fa, pp. 490-491.


(e) Criteria. We have seen that most of the clauses provide objective orsubjective criteria in order to guide the re-negotiation by the parties.Sometimes, criteria are also provided to third parties: either the criteriaapplicable to the parties themselves are rendered implicitly applicable tothe third party, or specific criteria are defined in connection with the intervention of the arbitrators, where the same two orientations as before arealso found:

• "... dans la mesure necessaire pour retablir la position relative desparties ..."

• "... de telle sorte que soit respecte l'esprit de collaboration et derepartition equitable des resultats qui a preside a l'etablissementde la presente association"

• "... having due regard for the interests of the other party ..."

It must be borne in mind that the bias of certain members of thegroup against notions like good faith or equity was particularly strong whenthese criteria were meant to guide the intervention of third parties in thecontractual relations.

(f) Procedure. The procedure to be followed in connection with theintervention of the arbitrators is sometimes determined indirectly when thehardship clause refers to the original arbitration clause in the contract. Inother cases, few indications were found in the clauses discussed by thegroup. For example:

• "La question est, it l'initiative de la partie la plus diligente, soumise al'arbitre ..."

• "... les arbitres, apres avoir entendu les parties . .."

(g) Binding Force of the Decision. To what extent is the decisionreached by the third party (or parties) binding? This aspect is linked to theproblem of the nature of the role of such arbitrators. The solutions embodied in some of the hardship clauses that have been examined are as follows:

• "... (the arbitrators) fixent librement la date d'entree en vigueurde leur decision "

• " des arbitres qui statueraient . .. "• " (parties) s'en remettraient ala decision d'un conciliateur ..."• " their decision shall be final and conclusive . .."• " any revised prices or other conditions so determined by said arbi-

trators shall take effect on the date when notice of arbitration wasfirst given unless the arbitrators decide a later date."

A very elaborate clause was submitted to the Group, in which a procedure that moderates the binding force of the decision of the arbitrators was


defined, which offers the parties a number of possibilities. Mter the arbitrators have reached their decision, the party who did not request arbitration, can, if it finds this decision unsatisfactory, terminate the contract afterproper notice during which the contract is maintained in its original formand conditions. On reception of this notice, the other party can eitheraccept the termination of the contract or decide that the contract will continue in its original form and conditions as if there had been no arbitrationor else postpone the termination of the contract to a further date, and thischoice is binding on the first party.

e. Fate of the Contract During Re-Negotiation

There was no special provision in the clauses brought to the knowledgeof the Group about what happens to the contract during the renegotiation. 2G If the contractual relations are deeply upset, and if the performanceof the contractual obligations is continuous or by instalments, this problemcan be very serious. This grave inconvenience can be mitigated by allowinga certain time period for the conclusion of the renegotiation, either by theparties themselves or through the intervention of arbitrators. In certaincases, however, the temporary suspension of the execution of the contractcould be arranged (the suspension here envisaged is suspension during thenegotiations, different from the case examined above in which suspensionoccurs if the negotiations fail).

G. Unilateral Clauses

Some of the hardship clauses examined are unilateral. This does meanonly that one of the parties has the possibility to renounce the contract if there-negotiations fail, but that the application of the whole hardship clause willdepend on the will of one of the parties alone: assessing the occurrence ofthe hypothesis, choosing the rules that will apply. For example:

• "Toutes difficultes survenant apres l'acceptation de votre commande relativement a l'obtention de devises, a des mesures depolitique commerciale, au contingentement, a la manipulationmonetaire, etc. ... , nous conferent Ie droit, suivant les circonstances, de modifier les conditions de paiement, de prolonger lesdelais de livraison ou de revoquer Ie contrat. Ce droit n'est pasreciproque. "

• "La banque pourra mettre fin a toutes les utilisations du creditdans Ie cas de survenance d'evenements, notamment d'evenements politiques exterieurs ou interieurs, susceptibles de perturberIe fonctionnement normal de l'entreprise du debiteur ou des institutions politiques ou financieres de son pays."

26 Cf., however, some brief indications contained in the clauses quoted sU!JTa, pp.


H. Return to Normal Circumstances

There can also be a provision for the case when circumstances returnto normal. Here is an example:

"To the extent that any occurrence of hardship as determinedunder this Section 13.9 shall have decreased or ended then anyrevision of prices or other conditions pursuant to an arbitrationaward shall likewise be changed or ended and the terms and conditions of the Agreement (if not already determined pursuant toparagraph b) here of) shall be restored to take account of the saiddecrease or ending of the occurrence of hardship."

On the other hand, the clause, already examined, whereby the contract is suspended for a certain period if the negotiations fail, grants thepower of termination to the parties at the end of this period if the hardshipcircumstances are still present. This implies that previous relations will beresumed if opposite circumstances prevail.

III. FINAL OBSERVATIONS

This systematic analysis of a large sample of hardship clauses leads to afew general remarks.

(a) Long-Term Contracts in a Changing Environment. A better awareness of the specific traits of long-term contracts is developing. 27 When contractual obligations are to be performed over a more or less lengthy periodof time, the implementation of certain traditional principles of contract lawcalls for some adaptations.

This is the case with the strict application of the principle of sanctity ofcontracts (pacta sunt servanda). The parties are certainly bound by theobligations they have undertaken, but consideration must be given to thefact that such obligations have been accepted in a certain environment,under a certain state of things.

If nothing changes (rebus sic stantibus), the parties remain bound bytheir original contractual provisions. But if the circumstances are deeplymodified, generating significant unbalance between the respective obligations, or rendering certain performances economically useless, it isconceivable that some undertakings may have to be reviewed. Such developments are more likely to occur when the contract is to be performed overa long period of time.

481-482, concerning the fate of the contract after notice of termination has been givenor in case the right to terminate the contract is not exercised.

27 Cf. supra, p. 212 and note 46, as well as infra, pp. 597-598 and 625-628.


However, the essential role played by the principle of sanctity of contracts, as a foundation of an efficient law of contracts, implies that undertakings can only be re-examined when the change in circumstances issubstantial, and when it considerably alters the parties' respective situations.

(b) Wide-Spread Acknowledgement of Changed Circumstances by theDifferent Legal Systems. The very brief comparative law presentation at thebeginning of this chapter28 recalled that most jurisdictions accept to reconsider the contract when circumstances are deeply modified throughnotions such as Wegfall der Geschaftsgrundlage, eccesiva onerosita, frustration orimpracticabiliy. In this regard, the restrictive position of French and Belgianlaw is exceptional.

This broad consensus is confirmed by the Unidroit Principles, whereArticles 6.2.1 to 6.2.3 deal with the notion of hardship. Hardship is definedas the occurrence of events which fundamentally alter the equilibrium of thecontract, provided that the events occur or become known to the disadvantaged party after the conclusion of the contract, that they could not reasonably have been taken into account by the disadvantaged party after theconclusion of the contract, that the events are beyond its control and thatit did not assume the risk of such events. In case of hardship, the disadvantaged party may require renegotiations. If the parties fail to reach anagreement within a reasonable time, either party may resort to the courts.If the court finds hardship, it may terminate the contract or adapt it with aview to restoring its equilibrium.29

28 Cf. sU!JTa, pp. 453-455 and the references given.

29 On these texts, d. D. Maskow, Hardship and Force Majeure, 40 Arner: J of Cmnp.I~aw, 1992, pp. 657-669; M. Fontaine, Les dispositions relatives au hardship et a la forcemajeure, in Contratti cmnrnerciali internazionali e Principe Unidroit, Milan, 1997, pp. 183-191;M. Prado, La theorie du hardship dans les Principes d'Unidroit relatifs aux contrats ducommerce international, Dir: del Cornrn. Int., 1997, pp. 323-373; A.G. Dudko, Hardshipin Contract: the Approach of the Unidroit Principles and Legal Developments in Russia,Unif. I~aw Rev., 2000, pp. 483-509.

Nevertheless, it has been shown that international arbitral tribunals are prudent.Arbitrators have a preference for enforcing contractual provisions (pacta sunt servanda) ,as they often consider that in international trade, professional operators are able, whenthey wish, to provide for change of circumstances by appropriate clauses. On the trendsof arbitral awards in this matter, cf. W. Melis, Force Majeure and Hardship Clauses inInternational Commercial Contracts in View of the Practice of the ICC Court ofArbitration,journ. ofInt. Arb., 1984, pp. 213-221 (in spite of the title of this article, noneof the decisions discussed concerned a contract including a hardship clause); D.Philippe, Pacta sunt servanda et Rebus sic stantibus, in Capport de la jurisprudence arbitrale, Paris, ICC, 1986, pp. 181-259; Ph. Fouchard, E. Gaillard & B. Goldman, Trait!: del'arbitrage cornrnen:ial international, Paris, 1996, pp. 28-29; H. Van Houtte, ChangedCircumstances and Pacta sunt servanda, in Transnational Rules in International CornrnercialArbitration, E. Gaillard (ed.), Paris, ICC, 1993, pp. 105-123.


The Principes of European Contract Law also contain provisions onchange of circumstances, obliging the parties to re-negotiate a contract thathas become excessively onerous for one of them, and giving the court several remedial possibilities when the parties fail to reach agreement(Article 6.111).

(c) Inadequacy of the Solutions Given by the Different Legal SystemsAdvantages of Hardship Clauses.

The interest of a hardship clause is obvious when the applicable lawhas a negative approach, as is the case in French and Belgian law. But suchclauses are just as frequently stipulated in contracts governed by legal systems that accept to take changes of circumstances into consideration.3o

The reason is that the remedies made available are generally deemed tobe inadequate. This will certainly be the case if the applicable law empowers the judge to terminate the contract. The parties usually want to continuetheir relationship. But it will also often be the case when the applicable lawallows the judge to amend the contract. If the parties prefer adaptation totermination, they hardly consider that a judge-or even an arbitratorwould be the person best qualified to decide of such adaptation.

This explains the relative success of hardship clauses. The parties prefer to organize a procedure in which a change of circumstances triggers renegotiation with each other in the first place.

The problem will however reappear in case renegotiation fails.

(d) The Inevitable Insecurity of Hardship Clauses. However, drafting ahardship clause is a very delicate matter.

In the first place, it is impossible to solve in a perfect manner the conflict between the inevitable imprecision of the events, which these clauseswould regulate, and the desire to clarify, as far as possible, these uncertainties. We have often noted the efforts made by the drafters of these clausesin order to diminish the grounds of insecurity, and we have, in general,approved of them. Attempts have been made to specify the events concerned, to gauge quantitatively the repercussions on the contract, to chooseobjective criteria to guide the re-negotiation, to organize an adequate procedure, especially under the hypothesis that amicable revision fails, to establish advance notice, etc. But these efforts can never be completely successfulowing to the particular nature of the circumstances concerned. The parties

30 Cf. H. Ullmann, Droit et pratique des clauses de hardship dans Ie systemejuridique americain, I.B.LJ, 1988, pp. 889-904.


who agree on a hardship clause must remember that this is inevitable, eventhough they devote their utmost care to the drafting of the clause.

The other significant difficulty is to arrange the situation when re-negotiation has failed. Many hardship clauses fail to provide for it,31 thus exposing the parties to serious problems. But none of the possible solutions isexcellent. Suspending the contract interrupts the exchange of values, termination is what one wanted to avoid and the intervention of a third partycauses problems under certainjurisdictions. 32 However, any of these solutions is better than no provision at all in case renegotiations fail.

(e) Nature of the Intervention of a Third Party in Adapting theContract. During the first discussions the Working Group devoted to hardship clauses in the 1970s, the nature of the intervention of the third partyhad appeared to be one of the fundamental problems hardship clausescaused. Although only a minority of received clauses (25 percent) wereproviding such an intervention, the legal questions involved seemed to beespecially important. 33

Arbitrators, experts, or conciliators? Does not the fact that the draftersof these clauses hesitate as to their wording reveal their embarrassmentwhen faced with such an intervention for its scope seems to be notably different from that of a traditional commercial arbitration?

It was thought, then, that one has to distinguish between the genuinerole of an arbitrator, i.e., to settle a legal dispute, and that of a third partyinvited to modify the contract in view of changed circumstances. The lattercase would no longer be arbitration in the proper meaning, but "irrevocable expertise," "economic arbitration" or "contract regulation."

31 Cf. sUfJTa, pp. 480-481.

32 In this respect, Article 6.2.3 of the Unidroit Principles has met some criticism,when it provides that should renegotiation fail, the court could terminate or readapt thecontract (cf. M. Fontaine, Les dispositions relatives au hardship et ala force majeure, inConlralli r:mmnen;iali inlernazionali e Priru;if)e Unidmil, Milan, 1997, pp. 187-188; F.Bortolotti, The Unidroit Principles and the arbitral tribunals, Uni/ Law Rev., 2000, pp.144-145). It is also known that in 1978, the International Chamber of Commerce published rules concerning the adaptation of contracts (ICC Publication. No. 326), whichset up a procedure available to parties wishing a third party to intervene, either to fill aninitial gap in the contract, or to readapt it within the context of a hardship clause, dueto a lack of agreement ben,yeen the parties themselves. The ICC rules offered two modelclauses, one inviting the third party to make a "recommendation," the other one askingthe third party to make a "decision" in the name of the parties. These rules were neverapplied and the ICC eventually abrogated them in 1974 (d. Ph. Fouchard, E. Gaillard& B. Goldman, Of). r:il., p. 31).

33 Cf. the first French edition of this book, Droit des contrats internationaux, 1989, pp.276-277.


The distinction would be far from academic. Arbitration in the classical sense conforms to a precise procedure; compliance with the arbitrationaward can be enforced through judicial exequatur: These rules do not applyto an irrevocable expertise. It is not certain which procedure is applicableif the parties have specified nothing (are there any due process rules to berespected, must the decision mention its grounds, etc.?); the expert's conclusions are integrated in the contract and any dispute arising in this connection can be brought before the courts.

The discussion relates to the more general issue of the intervention ofthird parties to fill the gaps in a contract, which does not only concernhardship clauses. This issue also appears in other chapters of this book. 34

There has been an evolution in ideas since this first debate took place.A broader concept of arbitration has developed. "Malgre sa force theorique,une qualification aussi etroite de la fonction de l 'arbitre ne convient ni aux partiesni aux besoins actuels de certaines relations contractuelles internationales. "35 Theneed to resort to arbitration after re-negotiation failed is indeed a situationwhere the parties disagree. In practice, arbitrators do not hesitate to takeup such a role. 3G It is significant that the distinct rules on contract regulation that the International Chamber of Commerce deemed adequate andissued in 1978 were never applied and were abrogated in 1994.37

(f) A Model Hardship Clause? The foregoing analysis of a hardshipclause should be followed by a synthesis. Could this not take the shape of amodel hardship clause? The group did not consider proposing such a clause.

The analysis of about 70 clauses has shown many different aspects ofthe hardship clause, each of which may be of real importance. In addition,our objections have pointed to various insufficiencies, which drafters of

34 Cf. sLlfna, Chapter 1, concerning letters of intent, and infra, Chapter 10, concerning English clauses.

35 Cf. Ph. Fouchard, E. Gaillard & B. Goldman, op. cit., p. 28. Cf. also A. Prujiner,L'adaptation forct~e du contrat par arbitrage, 37 Rev. Dr: McGill, 1992, pp. 428-447,and the references cited; Ch. Jan-osson, Les frontieres de l'arbitrage, Rev. Arb., 2001,pp. 5-41.

36 Cf. the awards referred to by Ph. Fouchard, E. Gaillard & B. Goldman, op. cit., p.31, as well as P.Y Gautier, L'arbitrage Quintelledevant lesjuges de la Colombie britannique: la clause de hardshifJ, invitation a l'ultra fJetita, Rev. Arb., 1991, pp. 611-623.Compare the famous decision rendered on September 28, 1976 by the Cour d'Appel deParis (HDF c/ Shelf), discussed in the first French edition of this book (Droit des contratsinternationaux, 1989, pp. 283-284), where the court did not hesitate to order the partiesto meet before an "observer" to try to agree on a price revision, while the court reservedthe possibility for itself to decide such a revision in case the parties failed to agree.

37 Cf. supra, note 32.


hardship clauses should remedy. But an "ideal" clause, which would includecumulatively all the improvements suggested, would be a legal monstrosityon account of its size and complexity. In particular, its construction wouldbe so difficult that it could, on its own, cause the failure of the initial negotiation by the parties. It is probably ill-advised, when the contract is beingconcluded, to emphasize too much the possibility that the proposed agreement may be called in question in the future. The negotiator, who wishesto include a hardship clause in the contract, must look for an ideal balancebetween the desire to give this clause perfectly appropriate wording andthe fear that its elaboration might be responsible for the failure of thenegotiations.

In addition, each sector of the economy, each type of contract, eachnegotiation has its peculiarities. A hardship clause included in a contractfor the supply of cnlde oil will not be worded in the same way as a hardshipclause in a loan agreement on the euro-dollar market. The diversity of thesituations where these clauses appear is another reason why the elaborationof a model clause must be abandoned.

The foregoing analysis should rather be used as a memorandum, complemented by various suggestions and critical observations, in whichdrafters of hardship clauses should be able to find the elements they thinkare appropriate for the proposed operation, without jeopardizing the general atmosphere of the negotiations.38

A hardship clause can play an essential role in a long-term contract, inorder to avoid that a rigourous application of the principle of sanctity ofcontracts leads to unbearable consequences. However, negotiators must beaware that such a clause, even when excellently drafted, will always be delicate to implement.

38 The same approach is followed by UNCITRAL, in its I"egal Guide on Drawing UpInternational ContractsJorthe Construction oJIndustrial Works, New York, 1988, pp. 241-247.In its first edition of Fon;e rnajeLlre el irn!Jrlmisior!, Publication No. 421, 1985, the ICC alsopreferred not to propose a model hardship clause, but rather drafting advise (a modelforce majeure clause was then already proposed). In its new edition, however, the ICCnow proposes model clauses for hardship as well as for force majeure (ICC ForceMajeure Clause 2003 and ICC Hardship Clause 2003).

CHAPTER 10

"ENGLISH CLAUSES," MOST-FAVOREDCUSTOMER CLAUSES AND FIRST-REFUSALCLAUSES IN INTERNATIONAL CONTRACTS

I. INTRODUCTION

This chapter bridges the two preceding ones, dealing with two situations (force majeure and hardship) where the occurrence of new circumstances leads to reconsideration, and often to re-adaptation of the contract,and Chapters 12 and 13, which will examine the termination of the contract, and its survival through certain obligations that continue to bind theparties beyond the achievement of the main purpose of the agreement.

So-called "English clauses" and most-favored customer clauses providefor the re-adaptation! (and sometimes the termination) of the contractwhen market conditions have changed: either one party has received amore favorable offer from a third party, or the other party has offered morefavorable terms to a third party. As for a party benefiting from a first-refusalclause, it will be offered the preferential opportunity ofjointly carrying outa new transaction with the other contracting party.

It is easy to justify analyzing these three types of clause together.

What "English clauses" and most-favored customer clauses have in common is that they make it possible to adapt the contract to meet the morefavorable terms offered by or granted to a competitor. English clauses andfirst-refusal clauses often appear as alternatives: a supply contract, for example, may be entered into on a long-term basis with the possibility of adapting or ending the arrangements provided by an English clause or on ashort-term basis with a first-refusal clause allowing new contracts to be concluded for subsequent periods. The three clauses have undeniable technical similarities, as our analysis will show, for example with regard to theproblem of the comparability of terms and conditions. All three make relations between the parties depend on the actual or potential intervention ofcompetitors.

1 Cf. J.M. Mousseron, Technique wnlracluelle, 2nd ed., Paris, Lefebvre, 1999,pp. 599-602; W. Peter, Arbitration and renegotiation clauses, Jawn. Int. Arb., 1986,pp.29-46.

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The Group collected and analyzed over 50 such clauses.2

The successive examination of English clauses (Section II), mostfavored customer clauses (Section III) and first-refusal clauses (Section IV),based on a sample of more than 60 clauses, will enable the nature and economic role of each of those clauses to be better defined, their respectivestructures to be examined in detail and the main pitfalls to avoid in theirdrafting to be highlighted. The Chapter will conclude by setting out threespecific legal problems that such clauses are apt to raise (Section V).

II. ENGLISH CLAUSES

A. Definition, Economic Role

An English clause (sometimes also called "alignment clause," "competitive offer clause" or "meet or release clause") gives a contracting partyA (generally a buyer) the right to rely as against the other contracting partyB (the seller) on an offer from a third party that is more favorable than theterms and conditions of the current contract. If B agrees to match the competitive offer, the contract continues on the new terms and conditions. If Bdoes not so agree, A may enter into a contract with the third party and thecontract between A and B will generally be suspended or terminated.

Here is a initial example of such a clause:

"Si en cours d'execution du contrat, l'acheteur notifie au vendeurla reception d'une offre concurrente emanant d'un fournisseurconnu et serieux, faite a un prix inferieur au prix contractuel,toutes autres conditions (notamment de quantite, de qualite et deregularite) restant egales, Ie vendeur devra, dans les 10 jours de lanotification par l'acheteur, rencontrer les conditions de l'offreconcurrente.

"A defaut d'accord avec l'acheteur, celui-ci sera libere de l'obligation d'acheter au vendeur et Ie present contrat prendra fin a l'expiration du delai de 10 jours accorde au vendeur."

Typically, an English clause will be incorporated in certain long-termcontracts, in particular, supply contracts granting exclusive rights or con-

2 Cf. J.P. Desideri, /"a priiference dans les relations contractuelles, Aix-en-Provence, 1997,pp. 49-57; M. Trochu, Les clauses d'offre concurrente, du client Ie plus favorise et depremier refus dans les contrats internationaux, I.B.L], 2002, pp. 303-320. Very little litigation is known in practice concerning such clauses; no arbitral award will be cited. Thismay be explained either by the fact that such clauses may be less frequent than they werein the past, or because their implementation is more apt to lead to a negotiated commercial solution than to a judicial procedure. However, the compatibility of such clauseswith the rules of competition has lead to a few decisions (d. infra, pp. 532-535).

"English Clauses," Most-Favored Customer Clauses, Etc. • 495

cerning large quantities. They are frequent in sectors especially influencedby cycles or experiencing important price variations.3 A buyer entering intoa long-term commitment will want to be able to get the benefit of any subsequent change in market conditions, which would enable him to obtainits supplies on more favorable terms. Such clauses therefore resemble pricereview clauses, the review being achieved here by reference to the specificbenchmark of the more advantageous competitive offer on which thebuyer may rely.

But the review is not automatic. First, the other party may refuse tomatch the competitive offer, in which case the contract will be suspended orterminated. But the very application of such a clause pre-supposes that thethird party's offer is made on terms and conditions comparable to those governing the relations between the contracting parties. This comparability is themost difficult problem in drafting and applying English clauses.4

B. Concept of a More Favorable Offer

When is it possible to say that a third party's offer is more favorable? Inthe simplest type of case, it might be enough to compare two prices.However, in general, the situation will be more complicated. Two offersmay be made at the same price, for instance, yet differ in terms of paymentarrangements. If the contract is at all elaborate, the comparison will alsohave to extend to each of the clauses in the contract. If these are not identical (and it is most unlikely that they would be for transactions of any sizeor for contracts intuitu peTSonae), assessing the equivalence of terms andconditions or the more favorable character of one of the contracts becomesextremely delicate. This will also be true where the object of the contract,instead of being an everyday product, is a product with a high degree oftechnical sophistication, such as electronic equipment.

It is also important that the competitive offer be made by a reputablebusiness, which is likely to meet its commitments under the same conditions as the other contracting party against whom the offer is invoked, andis likely to remain open for a sufficient period of time, unlike "spot" pricesoffered exceptionally for limited quantities and a short period of time.

Then again, it is desirable to rule out the risk that the alleged competitive offer has been made by a business that is friendly with the buyerand conspiring with him to artificially trigger a revision of the contact orcause it to be called in question.

3 Cf. J. Levy-Morelle, unpublished document (available from the authors).

4 We shall encounter this very problem again, rnutatis rnutandis, in relation to mostfavored customer clauses and first-refusal clauses.


These different requirements are difficult to translate into writtenclauses. Here are a few examples taken from the clauses gathered by theWorking Group:

• "... une offre concurrente emanant d'un fournisseur connu etserieux, faite aun prix inferieur au prix contractuel, toutes autresconditions (notamment de quantite, de qualite et de regularite)restant egales ..."

• "an offer from a producer or from a marketing organization representing a producer of ... of at least equal quality, under similarterms and conditions, at a price lower than the current contractprice with 'Buyer,' and in a quantity not less than the total maximum quantity which 'Seller' is obliged to sell for the next contractyear ..."

• "... un prix (inferieur) ... offert a (l'acheteur) pour la totalite deses besoins par un producteur de la C.E.E., connu et serieux,toutes autres conditions notamment de qualite, de paiement et deregularite des livraisons, etant egales ..."

• "... un prix de marche normal et loyal offert al'acheteur par unautre producteur de ... connu et serieux, toutes autres conditions(notamment de quantites, qualite et regularite) etant egales "

• "... if Buyer receives from an established ... producer in the .countries a bona fide written offer to supply Buyer its productrequirements for the following year at a lower price than the ...then current price under this contract and guarantees delivery ofthe yearly tonnage in such year as stated in the paragraph entitled'quantity' and of a quality equal to that provided for in this contract ..."

• "... une offre de bonne foi emanant d'une autre source sure,independante du groupe de l'acheteur, pour la fourniture debiens de qualite egale dans des conditions et sur des bases comparabies ..."

• "En cas d'offres repetees faites a des concurrents ou a des clientsde l'acheteur situes dans Ie marche europeen pour des produits dequalite comparable et ce, pour des quantites substantielles etregulieres ..."

The examples cited attempt to meet the concerns raised about the characteristics that the competitive offer must have in order to be taken intoconsideration. A few comments are needed here. References to good faithand fairness are included to defeat offers of convenience. References to theestablished nature and standing of the maker of the competitive offer andto terms and conditions other than the price (quality, quantities, reliability,etc.) are designed to avoid simplistic comparisons. But the difficulties inapplying these criteria in a real-life situation must not be underestimated.


C. Proof of Competitive Terms and Conditions

The question of what may constitute proof of competitive terms andconditions is also a delicate area. The buyer must obviously convince theseller of the real existence of the offer that he seeks to rely upon and putthe seller in a position to assess its comparability. The most direct method isto show the seller the competitive offer. But is that not contrary to businessethics, or even-in certain sectors, by revealing the price policy of a competitor-to the rules of competition?:) There were different opinions withinthe Group on that point. In any event, there is a risk that relations with thethird party will be jeopardized if it comes to its knowledge that its offer hasbeen submitted to a competitor; a fortiori, if it were to turn out that the offerwas used only to bring about a revision of the existing contract.

One solution would perhaps be to ask a competent independent outsider to examine the competitive offer and to compare its terms and conditions. Ideally, that procedure should provide the seller with the necessaryre-assurance, while ensuring the desired discretion vis-a-vis the offeror. But,in practice, the appointment of a competent independent outsider isbound to be problematic. 6

Some of the clauses examined by the Group were silent on the question of proof. It probably goes without saying that the buyer cannot merelyinvoke a competitive offer without being in a position to prove that it exists.However, an express provision would appear to be preferable.

Yet the clauses alluding to the question of proof are not very explicit.In general, they merely require the buyer to furnish sufficient proof, usually in writing, of the third party's offer:

• " Buyer must furnish satisfactory proof of said offer "• " fournir une preuve ecrite suffisante de ladite offre "• " en fournissant (au vendeur) tout element de preuve neces-

saire ..."• " giving evidence of such offer ..."• " l'acheteur devra apporter des elements de preuve convain-

cants en ce qui concerne tant Ie niveau des prix que Ie prejudiceque ceux-ci font subir ases activites de producteur de ..."

Two of the clauses examined provide for the involvement of an independent party.

5 Cf. J. Levy-Morelle, document cited above, note 3.

6 The problem of possible recourse to an independent assessor will be taken upagain infra, pp. 524-527.


"... so as to preserve the offeror's anonymity, the third party offermay at X's option be presented to Y through a mutually agreedindependent intermediary who will vouch for the existence andvalidity of the offer ..."

In another example no stipulation was made for involvement of theindependent party at the stage when the competitive offer was received,but such involvement remained open as an option that the seller reservedfor himself, a posterior-i, if he did not match the offer and the contract wassuspended:

"In case Buyer suspends delivery because of having received loweroffer from (country), Seller reserves the right to analyse by aninternationally recognised laboratory, the first cargo or any cargoreceived thereafter for the tonnage substituting this contract. If theresults of this analysis are inferior to the quality terms statedherein, Buyer will be obliged to immediately resume deliveryunder this contract."

Several members of the Group considered this clause very dangerous.What, in fact, is an "internationally recognized laboratory"? Is it possible toguarantee the objectivity of an analysis of quality? It is also observed that,under the system laid down by this clause, the buyer may find himself at animpasse in the event that he has become contractually bound to the thirdparty, and the results of the analysis require him to resume his relationshipwith the seller.

D. Repercussions on the Contract

In the event that the buyer has actually received a more favorable offerfrom a third party, what will be the repercussions on the contract? Clauses,which give the contracting party the right to match a third party's offer, allprovide a fundamental choice: either the seller agrees to match the termsand conditions or the buyer may contract with the third party. But thereare different possibilities involved in each of the two choices.

Bringing the conditions into line is usually achieved by a straight modification of the price to meet that proposed in the competing offer:

• " Seller shall notifY Buyer whether or not it will reduce the priceof to meet the competitive offer ..."

• " l'acheteur serait tenu, avant d'accepter l'offre concurrente, de pro-poser au vendeur d'effectuer les fournitures ace prix inferieur ..."

Some, however, prefer renegotiation to automatic adaptation:


• "Dans cette eventualite, les parties se concerteront immediatementen vue d'adapter Ie prix dans un esprit d'equite."

• "... les parties se concerteront en vue de rechercher des amenagements acceptables par les deux parties, Ie vendeur conservanten tout etat de cause Ie droit de preference aux conditions de l'offre concurrente."

That re-negotiation technique brings competitive offer clauses closerto hardship clauses and the reference to equity in the first example will benoted in this connection. 7 The second example contains an importantguarantee for the seller since he is guaranteed preference in any eventwithin the terms and conditions of the competitive offer.

So, if the terms and conditions are not matched, the buyer will be freeto enter into a contract with the third party. But since English clauses are,in general, included in long-term contracts, to be performed in installments, the possibility to accept a third party's offer for supplies will usuallybe limited to a specified period, for example one year:

• "... Buyer shall have the right ... to purchase said quantity ofproduct from such producer or marketing organization makingsaid bonafide offer, during the next contract year ..."

• "... l'acheteur aurait Ie droit ... d'accepter l'offre concurrente ...pour les fournitures de l'annee calendaire suivante ..."

In the meantime, the initial contract will be suspended:

• "... this contract shall be suspended during said twelve monthsperiod."

• "... etant entendu que l'execution du present contrat serait suspendue pour la duree de l'annee calendaire suivante."

• "... l'acheteur aura la faculte de suspendre Ie contrat pendant uneduree de nonantejours maximum; al'echeance de cette periodede suspension, Ie contrat reprendra ses pIeins effets, les quantitesnon livrees etant purement et simplement annulees ..."

Rather rarely, the seller's refusal to match the competitive terms andconditions triggers the definitive termination of the contract:

"A defaut d'accord avec l'acheteur, celui-ci sera libere de l'obligation d'acheter au vendeur et Ie present contrat prendra fin al'expiration du delai de 10 jours accorde au vendeur (pour accepterles conditions concurrentes)."

7 Cf. SLlfJTfL, Chapter 9.


E. Procedural Matters

In order for English clauses to operate, a number of procedures needto be put in place: the parties must be given notice in a specified formwithin specified time limits. The buyer must give notice of the competitiveoffer to the seller and the seller must let the buyer know if he decides tomatch the offer or not. If the seller decides against matching the offer, thebuyer may, if appropriate, give the seller notice of his intention to suspendor terminate the contract.

In general, it is provided that such notice is to be given in writing, possibly even by registered post. However, it seems that, in practice, notice bytelephone, fax or e-mail is preferred. What time limits are involved? Noticeshould first of all be given when the buyer has received the competitiveoffer and intends to invoke the clause. Sometimes it is stipulated that suchnotice can only be given at a certain time of the year. More specific timelimits should be given for the seller to serve notice in response, and fornotice-where given-of the buyer's final decision, since further performance of the contract will depend on it. It is desirable that those time limits should be relatively short, especially if the contract is for products whoseprice is subject to sharp fluctuations. Some members of the group stressedthe importance of stipulating very precise time limits (when they are tostart, whether statutory holidays are to be included, etc.); others consideredon the contrary that such time limits were only a guide.8

The following two examples, taken from English clauses, illustrate hownotice procedures may be put in place:

• "... 'Buyer' must furnish satisfactory proof of said offer before the1st February of each year.Within forty (40) days after receipt of said offer, 'Seller' shall notify'Buyer' whether or not it will reduce the price of the ammonia forthe next contract year to meet the competitive offer. If 'Seller' shallrefuse to make such a price reduction within such forty (40) daysperiod, 'Buyer' shall have the right, upon giving written 'Notice ofTermination' within twenty (20) days after expiration of the periodduring which 'Seller' may meet such competitive offer, to purchase

R In English law, the "time is of the essence" rule requires time limits to be strictlyadhered to. This is the case when it is expressly provided in the contract, when one partyhas notified the other of it or where it flows from the very nature of the obligation. Inthe view of the English members of the group, most of the time limits mentioned above(with the possible exception of that fixed for the first notice to be given by the buyer)would be strictly applied, analogous to the applicable rules to time limits for exercisingan option. For the "time is of the essence" rule, see, in particular, J. Beatson, Anson'sLaw (!!Conlnu;l, 27th ed., Oxford University Press, 1998, pp. 476-477.


said quantity of product from such producer or marketing organization making said bona fide offer ..."

• "... Buyer shall notify Seller in writing giving evidence of suchoffer, and the Seller shall notify the Buyer whether or not it willmeet said lower price within 30 days after date of said notice fromBuyer to Seller.If Seller meets such lower price it will become effective 30 daysafter date of notice, and this contract or any extension or renewalhereof shall remain in full force and effect; if Seller does not meetsuch lower price, Buyer may suspend delivery during that contractyear 30 days after date of said notice ..."

F. Constraints on the Application of the Clause

An English clause poses a threat to the normal performance of contractual obligations. The seller who consents to its inclusion in the contractwill often seek to limit the frequency of its application. Several types of constraint may be envisaged.

It may be stipulated that only competitive offers, whose terms and conditions differ by a required minimum from the current contract, are allowed:

"Si l'acheteur apporte au vendeur la preuve ecrite d'une offre debonne foi ... aun prix de plus de X% de la parite franco destination du prix contractuel tel que defini ci-dessus ..."

A period of grace is sometimes laid down before the buyer is entitledto rely on an existing more favorable offer:

"If after the first two years of this contract, Buyer should receive anoffer ..."

A restriction may be placed on the frequency with which the clausemay be relied upon or on the period of the year in which the buyer has theright to rely upon it.

• "11 est toutefois entendu que l'acheteur ne pourra faire etat d'une telleoffre concurrente qu'avant Ie debut de chaque annee civile ..."

• "Such a notification should not be given later than 30 Septemberpreceding the calendar year of delivery ... ; notification cannot begiven more than once in any year."

The buyer may forgo his right to rely on the clause for a given periodof time when the seller has matched a competitive offer:


"If Seller agrees to make such price reduction, Buyer shall notrequest Seller to meet another offer from any producer or marketing organization for at least another twelve months period."

As observed above, in the event that the seller refuses to match the offer,the buyer may, in general, enter into a contract with the third party only fora limited period and the initial contract is suspended in the meantime.

G. Variants of the Clause

We have just described a typical English clause, with the various provisions for its application. The Working Group discovered, however, severalinteresting variants.

(a) In most cases, it is the buyer who has the right to rely on a thirdparty's competitive offer (unilateral clause). A situation where the sellerreserves that same right is also possible when the seller receives a betteroffer from a buyer competing with the other party to the contract ("bilateral clause").

The clause below, however, does not exactly reflect that situation. It isnot, strictly speaking, a competitive offer that the seller seeks to rely uponagainst the buyer, but rather the higher price that he successfully chargesother customers.

"Suspension by Seller. If at any time covered by the period of thisAgreement Seller's then prevailing Net Export Price-i.e. the priceactually paid by Seller's most favored customers, excluding anyexceptional rebates, discounts or allowances, etc., in arm's lengthexport transactions, basis EO.B. vessel port, for sale of comparablequantities of (products) under substantially similar terms and conditions, plus the cost of freight (not to be higher than the prevailing freight market price on a charter basis) and Seller's otherreasonable costs, if any, for delivery Cost and Freight Free Out oneport Antwerp/Rotterdam range-is greater than the then SellingPrice for 180 consecutive days or more, then in that event Sellershall have the right at any time thereafter, on 90 days' writtennotice to Buyer to suspend this Agreement for 180 days (commencing at the end of the 90 days notice period) after which thisAgreement shall terminate, unless before the end of such 180 dayssuspension period, Seller shall elect to meet the Selling Price, orunless Buyer and Seller shall have reached agreement for theresumption and continuation of deliveries hereunder, or unlessduring such 180 days period the conditions which entitled Sellerto suspend shall have ended ..."


The clause continues by providing for similar arrangements to apply inthe event that the "net export price" is greater than the "selling price" for270 days or more, consecutive or not, and also for the automatic replacement of the "selling price" by the "net export price" in the event that thedifference between the two exceeds a given percentage; in such a case, thebuyer may elect to suspend the contract.

(b) Another clause examined by the group enables the buyer to relyagainst the seller on more favorable offers made by third parties not tohimself, but to his competitors or to his customers:

"En cas d'offres n§petees faites ades concurrents ou ades clientsde l'acheteur situes dans Ie marche europeen pour des produits dequalite comparable et ce, pour des quantites substantielles etregulieres et ades niveaux inferieurs d'au moins X% du prix dupresent contrat, l'acheteur aura la faculte de demander-pour uneperiode n'excedant pas trois mois-Ia suspension de l'applicationde la formule et son remplacement par un prix forfaitaire s'approchant du prix concurrent.

"Afin de pouvoir valablement se prevaloir de cette faculte, l'acheteur devra apporter des elements de preuve convaincants en cequi concerne tant Ie niveau des prix que Ie prejudice que ceux-cifont subir ases activites de producteur de ..."

(c) Finally, a clause giving the other contracting party the right tomatch a third party's offer is sometimes combined with a most-favored customer clause.

III. MOST-FAVORED CUSTOMER CLAUSES

A. Definition, Economic Role, Comparison With English Clauses

By means of a most-favored customer clause, a contracting party undertakes to offer to the other contracting party the same most favorable conditions which it would offer to a third party under a similar contract.9

9 This clause, examined here in its application to international contracts, is alsofamiliar to specialists of public international law, since it is commonly stipulated in international treaties as "most-favored nation clause"; GATT (Article I), GATS (Article II) andTRIPS are the most significant examples. The clause is also to be found in cases concerning international investments; d. e.g., the ICSID award ofJune 27, 1990, AsianAgricultural Products Ud. (AAPI) Hong Kong v. Republic oJSri I~anka, 30 j.LM., p. 580,ICSID Review Foreign Invest. Law} 1991, p. 526, Yearb. CO'fflrtl. Arb., XVII, 1992, p. 106.


Here is an example of such a clause:

"Dans Ie cas OU Ie fournisseur serait amene aconsentir ad'autresclients des conditions qui, dans leur ensemble, seraient plus favorabIes que celles prevues au present contrat pour des quantites etune qualite comparables, Ie fournisseur s'engage aen faire beneficier Ie client acompter du jour de leur application aun tiers."

In common with English clauses, most-favored customer clauses areto be found in some long-term supply contracts. But the group alsoencountered some examples in sales concession and in technology transfer contracts. lO

The purpose of such clauses is also to enable a long-term contract tobe adapted to changes in market conditions in order to avoid that one ofthe contracting parties finds itself at a disadvantage in relation to its competitors. However, the event, which triggers the application of the mostfavored customer clause, is not the same as it is in the case of an Englishclause. Take, for example, a contract between A and B; A may, in the firstcase, require the terms and conditions of the contract to be brought intoline with an offer that he has personally received from a third party (competitive offer), and in the second case A may require that they be broughtinto line with terms and conditions that B has granted to a third party(most-favored customer).

Most-favored customer clauses therefore provide for the contractualterms and conditions to be adapted. Unlike clauses giving the other contracting party the right to match a third party's offer, it does not appear, incontractual practice, to confer a right to refuse to match the other offer orto lead to the suspension or termination of the contract.

The substantive analysis of most-favored customer clauses that followsshows, however, that they have a number of characteristics in common withEnglish clauses.

B. Comparability of Terms and Conditions

The beneficiary of a most-favored customer clause is entitled to requirethat its contract be brought into line with more favorable terms and con-

10 Cf. J.M. Deleuze, I~e contrat de transJert de processus technologique, Masson, 1976, pp.58-59, 137-138. The law and practice of co-insurance also reveals the existence of "mostfavored insurer clauses": the insured promises the insurers willing to enter a co-insurance scheme on the basis of certain terms that they will benefit from the more favorableterms the insured would grant to newcomers (cf. E. Pena Trivino, Comentarios sobrela c1ausula del reasegurador mas favorecido, Reo. Ibero-I~atioarnericana de SeguTOs, 2003, pp.233-242.


ditions that the other party to the contract may have granted to third parties. But how is the "more favorable" nature of such terms and conditionsto be assessed? The problem of comparability arises here in the same wayas it did in the case of English clauses.

Sometimes the contracting parties are not at all aware that this problem exists (or that the other difficulties described below exist), merely stipulating that

"... Ie vendeur appliquera al'acheteur pendant la duree du contrat la clause du client Ie plus favorise."

Such a rudimentary clause is clearly to be eschewed. It paves the wayfor all sorts of possible disputes.

It is important at least to specify whether the comparison will extendonly to prices or whether the contractual terms and conditions, as a whole,will be taken into consideration.

A standard clause designed to be included in a licensing contractimplicitly refers to the alternative by specifying, in parentheses, that onlyroyalties may be examined in making the comparison:

"If at any time hereafter the licensor shall grant a licence toanother on more favorable terms (as to royalty) than are grantedto the licensee hereunder ..."

It is rare, however, that the parties would have the application of theclause depend only upon a comparison of the respective prices. Theclauses of a contract form an indivisible whole. A lower price may be dueto other terms and conditions relating to quality, delivery times, methodsof payment, the duration of the contract, whether there are any linkedagreements, etc. The wording of most-favored customer clause generallyrefers to all the terms and conditions of the contract that is claimed to bemore favorable, while possibly referring explicitly to one or more of thoseterms and conditions:

• "In the event that A shall hereafter grant any third party a licence... at royalty rates lower than the rates specified in article IIIhereof by an agreement containing substantially the same termsand conditions as this agreement ..."

• "Der Auftragnehmer gewahrleistet hiermit, dass die im Vertragenthaltenen Preise und die wahrend der Laufzeit des Vertragesanzubietenden Preise fair und angemessen sind und den Preisenentsprechen, die nach der Meistbegunstigungsklausel des Auftragnehmers fur gleiche Artikel unter vergleichbaren Bedingungenund Umstanden gezahlt werden."


• "Le contractant garantit que les prix fixes ci-devant ne sont pasplus defavorables que ceux que, ramenes ades circonstances comparables, il accorde a tout autre acheteur national ou etranger,gouvernmental ou prive ..."

• "... Licensee shall be entitled to the benefit of such lower licencefees ... only for so long and to the extent and subject to the sameconditions that such lower licence fees shall be available to suchother licensee, provided however that licensee shall not be entitledto such lower licence fees without accepting any less favorableterms that may have accompanied such lower licence fees ..."

• "Dans Ie cas OU Ie fournisseur serait amene aconsentir ad'autresclients des conditions qui, dans leur ensemble, seraient plus favorabIes que celles prevues au present contrat pour des quantites etune qualite comparables ..."

• "Le vendeur garantit a l'acheteur Ie traitement du client Ie plusfavorise, toutes autres conditions de livraison (notamment dequantites, qualite et regularite) etant egales ..."

In some of these clauses it is possible to identifY, inter alia, a concern toavoid taking into consideration more favorable terms and conditions,which have been granted to a third party in exceptional circumstances, forexample, for a very limited transaction.

However, what is not seen here is the concern to avoid connivance withthird parties that sometimes underlies English clauses. The most-favoredcustomer clause only applies in situations where one of the parties to thecontract concludes a contract on more favorable terms with a third party;it is difficult to see how, in that context, that contracting party could gainsome benefit from any possible connection with the third party.

C. Proof That More Favorable Conditions Have Been Granted

There is a danger, however, that the contracting party in question willavoid revealing to the other that it has granted more favorable terms to athird party. In the case of an English clause, the buyer could be trusted toproduce any such offer spontaneously since the result would be that thecontract would be adjusted to his benefit. The problem there was verifYingthat the alleged offer actually existed and checking its bona fides and substance. Here, the circumstances are very different. The most-favored customer clause operates to the detriment of the party that has entered into acontract with a third party; the concern here is that that party will seek tohide the fact that the new contract has been concluded. The original contracting party will therefore need to be provided with some means of investigation in order to avoid such a fraud.


Some most-favored customer clauses fail to face up to this problem anddeal with it, providing nothing as regards the manner in which the contracting party is to be informed of the more advantageous conditionsgranted to a third party. It is sometimes simply stipulated that the party,who has contracted with a third party, undertakes to inform the originalcontracting party, but without laying down any specific method of checking. Such clauses risk becoming dead letters unless there is a well-established relationship of trust between the parties.

A first step is made where the clause requires proof to be produced atany time showing that no third party is getting the benefit of more favorable conditions. But such proof can truly only be furnished by directlychecking the books and accounts of the party concerned. Some of theclauses examined by the group provide for such a check, which is to be carried out either by representatives of the contracting party itself or by anindependent assessor:

• "Der Auftragnehmer ist bereit dem Auftraggeber auf schriftlichenAntrag den Beweis fur die Richtigkeit dieser Versicherungwahrend der Laufzeit dieses Vertrages zu erbringen und vonBeauftragten des Auftraggebers im Betrieb des Auftragnehemersnachprufen zu lassen."

• "Alpha s'engage a produire, ala demande de Beta, la preuve del'observation des assurances donnees au premier alinea du presentarticle. A cet effet, elle remettra a Beta une attestation ecriteetablie par un controleur economique independant qui aura puprendre connaissance des documents commerciaux essentiels luipermettant de remplir sa mission. Cette procedure ne doit pasoccasionner de depenses supplementaires a Beta."

• "Der Auftragnehmer verpflichtet sich, dem Auftraggeber dieEinhaltung der ... gegebenen Zusicherungen auf Verlangennachzuweisen. Zu diesem Zweck wird Auftragnehmer nach Wahldes Auftraggebers entweder dessen Beauftragten Einsicht in aIlehierfur wesentlichen Geschaftsunterlagen gewahren, Abschriftendaraus anfertigen lassen sowie aIle erforderlichen Auskiinfteerteilen oder die schriftliche Bestatigung eines unabhangigenWirtschaftsprufers vorlegen. Hierdurch durfen dem Auftraggeberkeine zusatzlichen Kosten entstehen."ll

D. Repercussions on the Contract

Where it is established that more favorable terms and conditions havebeen granted to a third party, the beneficiary of the most-favored customer

11 As regards possible involvement of an "independent assessor," d.iflfra. pp.524-527.


clause may, in principle, require the contract to be brought into line withthose more advantageous terms and conditions:

"... then licensee shall be entitled to the benefit of such lower royalty rates ..."

It is important, however, to specify the precise moment from which thecontract is to be amended. The most common solution seems to be thatthe new terms and conditions are to apply from the date when the thirdparty benefited from more favorable terms and conditions, possiblytogether with a provision for the reimbursement of any overpayment madein the meantime, but with no retroactivity for the earlier period. Theclauses examined, however, were not always drafted as tightly as they couldhave been:

• "... les prix fixes ci-avant seraient reduits en consequence et lessommes payees en trop seraient remboursees."

• "... Buyer shall immediately be given a price and/or terms no lessfavorable."

• "... Ie fournisseur s'engage a en faire beneficier Ie client acompter dujour de leur application aun tiers."

• "... Licensee shall be entitled to the benefit of such lower royaltyrates on all operations thereafter conducted under this Agreement; provided, however, that such lower royalty rates shall notapply retroactively for Licensee nor shall this Article ... be construed to entitle Licensee to any rebate or reduction with respectto royalties paid or due by it prior to the grant by A of such lowerroyalty rates to such third parties ..."

The clauses quoted above merely provide for the contract to be automatically brought into line with the competitive terms and conditions.Although the Group did not find any example of this, it is possible to envisage that, in sufficiently elaborate contracts, the adjustment should be thesubject of negotiation.

Furthermore, as we have seen, it does not appear that refusal to adjustthe contract is an option under most-favored customer clauses as it is underclauses giving the other contracting party the right to match a third party'soffer. Without doubt it would be difficult to refuse to grant to the originalcontracting party terms and conditions that have just been granted to athird party.

E. Procedural Matters

The procedure for implementing most-favored customer clauses is simpler than that for English clauses, since the former do not entail a numberof possible choices.


It is simply a case of ensuring that notice of the conclusion of a morefavorable contract with a third party is given. The principal aspects of thisproblem have been considered above in relation to proof and verification.Doubtless, the clause may also stipulate that notice must be given within ashort period of the conclusion of the contract with the third party:

• "... si Ie contractant accordait des conditions plus favorables ad'autres clients, il en aviserait immediatement l'Administration ..."

• "... then Licensor shall notify Licensee promptly of such lowerlicence fees ..."

One question, which should perhaps be the subject of a special procedure in certain cases, is what happens when there is a difference of opinion between the parties as to whether the terms and conditions granted tothe third party are more favorable. The clause below contemplates that situation but does not specifY the method of settling the dispute:

"Lehnt der Auftragnehmer nach Vertragsabschluss die Anwendung dieser Meistbegiinstigungsklausel auf bestimmte Vertrage mitDritten ab, weil er die diesen Vertragen zugrundeliegenden Kostenverhaltnisse nicht mit den Verhaltnissen dieses Vertrages furvergleichbar halt, so verpflichtet er sich, diese Vertrage dem Auftraggeber unverziiglich schriftlich anzuzeigen und seine Auffassung zu begrunden."

If the dispute persisted, the general arbitration clause of the contractwould certainly be invoked.

F. Constraints and Limits on the Application of the Clause

The types of constraint on English clauses being used too frequently,which we saw above, do not appear to have a practical counterpart in thecase of most-favored customer clauses. One could, however, conceive of aprovision requiring a minimum difference to exist between the contractualterms and conditions and those granted to a third party before the termsand conditions had to be matched.

A geographical limit is sometimes applied to the clause. In view of thegreat differences, which may exist between markets and the extent of theactivities of the beneficiary of the clause, it may be provided that only morefavorable terms and conditions granted to companies in certain specificcountries are to be taken into account:

"In the event that A shall hereafter grant any third party a licenceunder the Patent Rights of A in any of the following countries(Austria, Belgium, Denmark, Finland, France, West Germany,Great Britain, Ireland, Italy, Luxembourg, The Netherlands,Norway, Portugal, Spain, Sweden and Switzerland) ..."


G. Variants of the Clause

(a) In one very specific case, the group found a clause similar to amost-favored customer clause in the context of a stipulation laid down forthe benefit of a third party.

A number of manufacturers of aircraft equipment simultaneouslynegotiated for the supply of aircraft with several governments. One of thosegovernments concluded a contract with one of the companies, and it stipulated in the contract on behalf of the other governments concerned thatthe company in question would not impose less favorable conditions onthose other governments than those granted to itself: instead of arrangingfor itself to have the right to benefit by any advantages that might subsequently be granted to a third party, the contracting party made provisionfor third parties to get the benefit of advantages that it itself obtained. Themechanism is, in a sense, reversed:

"Des apresent, les Preneurs d'ordre s'engagent, lors de la conclusion de pre-contrats et/ou contrat definitif avec (les pays X, Y et Z)... de ne pas exiger de ces Gouvernements, des stipulations plusdefavorables que celles accordees au Donneur d'ordre, dans Iecadre du present contrat, ou celles qui seraient convenues lors dela passation de pre-contrats etlou de contrats definitifs ulterieurs."

That clause goes on to refer to the terms and conditions of a contractalready concluded between another company and another government,and stipulates that the buyers are not to impose less favorable conditionseither on the purchaser or on other governments:

"D'autre part, les Preneurs d'ordre s'engagent, lors de la conclusion d'un contrat principal avec Ie Donneur d'ordre etlou lesGouvernements (des pays X,Y et Z), de ne pas exiger des stipulations plus defavorables que celles consenties par la firme ... , dansses contrats passes avec Ie Gouvernement (du pays Z) et IeDonneur d'ordre et, relatifs au meme objet contractuel."

(b) A most-favored customer clause is sometimes combined with anEnglish clause. Here is an example:

"B undertakes to give P most favorable price treatment in (country X) for their requirements within the market of (country X)... , that is to say that B will supply the Agreement products to Pat prices no higher and under conditions no less favorable thanthose at and under which the same products of equal quality aresupplied by B to any customer in (country X) ...


"If P receives from elsewhere a bona fide offer from a third partywhich in respect of quality and/or price and/or other conditionsis more favorable than B's offer, P will invite B to offer equivalentterms. B shall have a period of one month from the date of submission of the third party offer either to meet or to refuse to meetthe terms and conditions of said offer ...

"If B refuses to meet or fails to advise P of its decision within saidperiod of one month ... , P shall be released from their obligationto purchase agreement products from B, but only in respect of aquantity thereof which is equivalent to the quantity of comparableproducts which have been offered to P by the third party underterms more favorable than those of B."

Party P therefore gets all the advantages. It will benefit from the morefavorable conditions that contracting party B grants to a third party, and itmay ask B to match the more favorable conditions that P might be offeredby a third party. If the state of the market were to alter, it is even conceivable that the two situations might arise simultaneously and P could rely onthe more advantageous clause of the two.

In another case examined, the two clauses do not operate in favor ofthe same party, but one is granted to party A whereas the other operates inparty B's favor, A and B having agreed on an exclusive mutual supply agreement. That arrangement is proposed in the following letter:

"Messieurs,

"Voulant reconnaitre l'effort fait par votre societe de nous fournirles quantites de (produit X) necessaires a nos fabrications alorsque regne une grande penurie de matieres sur Ie marche, comptetenu aussi des prix favorables qu'en cette periode vous maintenezvis-a-vis de nous, notre societe a decide-a partir de ce jour-devous accorder pendant un terme de cinq ans, la priorite de fourniture de (produit X) pour la couverture de nos besoins normauxtels qu'ils vous sont connus (environ ... par mois).

"Cette exclusivite d'achat que nous reservons avos usines est subordonnee a la condition que vous continuiez a nous remettre descotations basees sur les prix internationaux pour des tonnagesequivalents.

"Nous ne pourrions acheter ailleurs que lorsqu'apres vous avoiravises de ce que votre cotation est plus elevee-toutes conditionsegales, vous auriez refuse de reduire votre prix au niveau de celui


prevu; cette decision devant nous etre signalee par ecrit dans les24 heures ouvrables de la communication dont question.

"D'autre part, nous vous avez donne l'assurance que c'est cheznous que vous vous approvisionnerez en produits Y de notre fabrication dont vous pourriez avoir besoin pour votre usage personnel; dans ce cas, nous nous engageons avous donner priorite delivraison et ce, au prix de notre client Ie plus favorise.

"Veuillez agreer, Messieurs, nos sinceres salutations."

IV. FIRST-REFUSAL CLAUSES

A. Definition, Comparison With Other Clauses

By a first-refusal clause (or preferential treatment clause, pre-emptionclause), party A undertakes to offer the beneficiary, party B, the opportunity in future to conduct a particular transaction jointly before concludingsuch transaction with a third party. In the event that B refuses, A is onceagain free to contract with some other party. 12

Here is a first example of such a clause:

"If and to the extent that in any year or quarter A should haverequirements of ... products or both in excess of the quantitiesotherwise deliverable hereunder in that year or quarter, B shallhave the first option (to be exercised within thirty (30) days ofreceiving due and proper notice thereof) to supply on the termsand conditions hereof. If B does not exercise the option to supplyany or all of such excess, A shall be free to purchase the deficitelsewhere."

When it concerns a sales contract, the first refusal clause is often called"pre-emption clause."

In order to get a better idea of the scope of first-refusal clauses, theyshould be compared with options and examined in comparison withEnglish and most-favored customer clauses.

(a) How Does a First-Refusal Clause Differ From an Option? A partygranting an option, after having proposed to conclude a contract with

12 For this clause, see J-M. Mousseron, Of). cil., pp. 77-86, as well as J- de Visscher'sold, but still relevant, study, Le fHu:le de fn4fereru:e, Brussels and Paris, 1938, 241 pp. Theauthor pays particular attention to the applications of the clause to sales of real propertyand share issues. Also see the examples provided in D. Fosbrook & A.c. Laing, The A-Zoj contract clauses, London, Sweet & Maxwell, 1997, Vol. First Refusal, pp. 152-153.


another party, undertakes to keep its offer open in favor of that party alonefor a certain time. During that time, the beneficiary may exercise theoption, in which case the contract is immediately and automatically concluded. In French law, the option itself is a contract, since it is the outcomeof a meeting of the minds between the parties even though it creates onlyan obligation for one of the parties (it is a unilateral contract).13 In Englishlaw, an option is, in principle, not binding in the absence of consideration,although consideration may take the form of the payment of a nominalsum, for example £1.14

Like a first-refusal clause, an option confers a preference on the beneficiary as compared with third parties with regard to the conclusion of acontract. But there are at least two differences:

An option applies to a transaction that has been decided upon. I amprepared to sell you my house and I give you an option to buy it. I therefore hold myself in readiness to carry out the transaction if you exercise theoption. If not, although I am not obliged to, I will, in all probability, seekto enter into a contract with a third party. IS A clause of first refusal, in contrast, relates to a transaction that mayor may not be carried out in thefuture. If, one day, I decide to sell my house, I undertake to give you firstrefusal. But it is possible that I will never put my house on the market. Anoption immediately comes into force whereas a first-refusal clause mayremain a dead letter. Hi

Furthermore, an option is granted on the basis of a complete, specificcontractual offer, with the result that if the option is exercised, this triggersthe immediate and automatic conclusion of the contract. Given the future

13 See J. Ghestin, I~aJorrnation du contrat, 'Fraite de droit civil, 3rd ed., Paris, L.G.DJ.,1993, pp. 300-305.

14 See J. Beatson, Anson 5 Law oj Contract, op. cit., pp. 53-55.

15 The operation can take place immediately (my house is for sale) or only in thefuture (leasing contracts include a purchase option that can be exercised at the end ofthe lease), but, in any case, the party granting the option agrees as of now to concludethe operation.

16 Compare Halsbury's Law of England, Contracts, para. 236: "Similar to the contractof option is the contract of "first refusal" or "pre-emption," whereby one person entersinto a contract with a second which provides that if the first person contemplates entering into a certain defined contract or type of contract with anyone, he will first offer todo so with that second person. That type of contract differs from the contract of optionin that the first person has made no positive offer; his duty will usually be the purely negative one of not contracting with any third person on the defined respect unless anduntil he has first offered to do so with the second person; but it is conceivable that hisduty may merely be that, if he does so contract with any third person, he will make thatcontract subject to the second person's right of first refusal"; cf. also M. Anderson, A-ZGuide to Boilerplate and Commercial Clauses, London, Butterworths, 1998, pp. 141-142.


and contingent nature of the envisaged operation, a first-refusal clausedoes not normally have those characteristics. When and if it operates, theconditions will have to be negotiated. Accordingly, several different situations must be distinguished.

On top of this, the terminology used, in practice, is not always fixedand the two expressions "option" and "first refusal" are sometimes usedone for another or interchangeably.

The Group's analysis exclusively covered true first-refusal clauses.

(b) The distinction between first-refusal clauses and English clauses iseasier to establish. The first type of clause covers the grant of preferentialtreatment for the conclusion of a new transaction (first refusal) and thesecond type enables the terms and conditions of a contract to be broughtinto line with a third party's more favorable offer (competitive offer). It ishardly possible to confuse the two. 17 There are several problems commonto these types of clauses.

We have already noted that, in certain circumstances, these clauses couldbe alternative procedures: a firm wanting to meet its supply requirements,but concerned always to do so on market terms, may either conclude a longterm contract with an English clause or else a short-term contract with a firstrefusal clause for the conclusion of subsequent contracts.

(c) Most-favored customer clauses are likewise different from firstrefusal clauses since, as in the case of English clauses, they also enable acurrent contract to be modified by reference to more favorable conditions,which have emerged in the relations between one of the parties and a thirdparty, and do not grant a preference with regard to the conclusion of a newtransaction. However, as we shall see, there are several features of the application of first-refusal clauses that resemble those discussed in connectionwith most-favored customer clauses.

B. Economic Role

Whereas English clauses and most-favored customer clauses generallyhave the same principal aim of enabling a long-term contract to be adaptedin accordance with changing market conditions, first-refusal clauses wouldappear to serve much more varied economic purposes. The following fewcases illustrate some of those purposes.

Case No 1. A supply contract is concluded between two firms. The contract is for certain pre-determined quantities, beyond which the parties are,

17 These clauses are however confused with each other in Clunet, 1974, p. 796, whendefining first-refusal clauses.


in principle, free to deal elsewhere. It is, however, provided that, for additional quantities, one of the parties should grant the other priority beforethat party enters into a contract with a third party.

The clause quoted at the start of this review of first-refusal clauses corresponds to that situation. Preference was given to the seller in the eventof the buyer having additional requirements. Conversely, such a clause maygive the buyer preference when it comes to purchasing any of the seller'sexcess production:

"In the event that Sellers in the first of 15 years of the DeliveryPeriod can deliver from the Reservoirs from the ... pipeline at theX terminal larger gas quantities than stipulated in paragraph 3.1,Buyers shall have the right to purchase such quantities if Buyers sodesire ..."

Case No 2. Two businesses collaborate in the development of a product.One of them gives the other the benefit of a first-refusal clause with respectto the purchase of basic materials and products:

"Compte tenu de la specificite des materiels et des produits necessaires al'utilisation des dispositifs, X consultera Y pour l'acquisitionde tels materiels et produits de base. Si, pour des caracteristiquesequivalentes, les conditions offertes par Y pour leur fourniture sontde meme ordre que celles des offres de la concurrence techniquement les plus proches, X s'engage areserver aYla priorite pour lafourniture desdits materiels et produits de base."

Case No 3. Firm A grants a manufacturing licence to a foreign partner B.To cover the event that B should consider exporting part of its production toanother country Z, B grants firm C, a subsidiary of A in country Z, the rightof first refusal regarding the distribution of products in that country.

"Dans tous les cas ou B exportera du pays X vers Ie pays Z, desvehicules B et/ou des pieces de vehicules B fabriquees par B, envertu des presentes, B devra proposer d'abord la vente desvehicules B et des pieces de vehicules B ala firrne C, ou telle autresociete qui aurait Ie droit d'agir comme distributeur des produitsA dans Ie pays Z.

"Si B et C, ou cette autre societe, n'etaient pas d'accord surl'ensemble des conditions et modalites d'un contrat de distribution, B aura alors la liberte de proposer un tel contrat atout autrepersonne, entreprise ou societe, acondition cependant que B nepropose pas par la suite acette personne, entreprise ou societe,des clauses ou conditions plus favorables que celles offertes aC, ou


tout autre societe, qui aurait Ie droit d'agir comme distributeur desproduits A dans Ie pays Z ..."

Case No 4. A wishes to purchase a building belonging to B. B does notintend to sell it at that time, but B agrees to a clause giving A first refusalin the event that B should change its mind:

"1. In consideration of ... paid by the grantee to the owner (thereceipt whereof the owner hereby acknowledges) the grantee shallhave the right to purchase the property known as [parcels] ... ifthe owner shall desire to sell [or otherwise dispose of] the saidproperty or any part of it within a period of twenty-one years.

"2. The owner shall give written notice to the grantee of his desireto sell the said property and the grantee shall within two monthsof the receipt of such notice give written notice (hereafter calledthe option notice) to the owner of his desire to purchase the property, then the following terms shall take effect.

"5. If the grantee does not serve the option notice within the time prescribed by clause 2 ... then the owner may deal with or dispose of theproperty free in all respects from the rights of the grantee ..."

Case No 5. Under an underwriting contract a company grants a banking consortium a right of first refusal over any subsequent issues:

"Au cas 011 la societe emettrait plus tard d'autres emprunts enSuisse, elle donnera aux banques un droit de preference, aconditions egales, pour la prise ferme de ces emprunts."

Case No 6. X and Y are considering the possibility of setting up ajointventure with a view to constructing a factory and producing a certain product. Feasibility studies are under way. X is hesitant and fears that an agreement will not be reached. But X wants to be in a position to change itsmind should Y subsequently enter into negotiations with a third party.

"Both parties agree to carry out the additional feasibility studywithin 3 months and to take their decision as to the establishmentof the joint venture and for its plant construction and productionschedule before December 1, 20 ...

"In case it is not decided at such date to establish the joint ventureand to proceed with its plant construction and production schedule, Y will be free to negotiate with a third party provided that,


until February 28, 20 ... , X will have a priority right to be exercised within one month from the date of notice that Y intends toenter into concrete business talk with a third party for the manufacture of the product."

Case No 7. A mining or oil prospecting syndicate is contemplating theeventuality that unanimous agreement cannot be reached with regard toprospecting in a particular area. In that event, the partner or partners wishing to proceed with the prospecting may do so alone (these are known as"sole risk clauses"), provided, however, that they first give the other partners in the syndicate the opportunity ofjoining in with them.

"8.1. Si l'ensemble des associes dans Ie syndicat considere une zonecomme meritant d'etre developpee, il constituera une S.E.P. quipourra utiliser les resultats obtenus. Si la S.E.P. juge qu'il est del'interet commun de prendre des permis de recherche ou d'exploitation, les caracteristiques de ces permis seront determineesd'un commun accord. A cet effet, la S.E.P. mandatera son gerant.

"8.2. A defaut d'accord de l'ensemble des associes dans Ie syndicat,comme prevu en 8.1., il est convenu que si, a tout moment, un ouplusieurs des associes (ci-apres designe par Ie ou les requerants(s))souhaite(nt) sur une de ces zones effectuer des travaux complementaires et demander un titre minier de recherche ou d'exploitation, il (ou ils) devra (devront) en informer prealablementles autres associes dans Ie syndicat et leur proposer de s'associer aeux pour l'execution des travaux complementaires et pour laditedemande. Les associes ainsi informes devront faire connaitre dansun delai de deux mois acompter de la notification qui leur auraete faite, leur decision de s'associer ou non au projet (programme,budget) presente par Ie ou les requerant(s). En cas de reponsenegative de certains des associes, ceux-ci ne pouvant s'opposer alarealisation de ce projet, Ie ou les requerant(s) pourront faire appelades concours exterieurs pour ladite realisation.

"Les droits des associes dans Ie syndicat qui ne poursuivront pas,feront alors l'objet de negociations entre les associes."

Case No 8. In the event that a joint venture is wound up, it is agreedthat certain participants will have a right of first refusal before others andbefore third parties for the purchase of certain assets.

"In the case of an asset of the Company situated in or in closeproximity to either the Assets (A) or the Assets (B), then A and Bshall respectively have a right of priority against the other and shall


procure for such other a right of priority against third parties topurchase such asset."

Case No 9. The statutes of a joint venture provide for a preferentialright for the participants in the event that one of the members shoulddecide to sell its shares.

"A Participant may offer to sell all of the shares owned by it and itsMfiliate(s) in both Companies to a specified third party or all or partof such shares to one or more specified Participants holding sharesin such Companies provided that the Participants other than theofferor holding shares in those Companies are first given an opportunity to purchase the shares on the same terms and conditions asoffered to the third party or the specified Participant(s) ...."

These few examples, which are far from exhaustive,18 give an illustration of the variety of situations in which first-refusal clauses may operate.

Readers will note that Case No.9, concerning preferential rights forpartners in the case of a sale of shares, reflects a situation that, to a certainextent, is not covered by freedom of contract in many countries. Often,company law lays down binding rules governing the participants' rights insuch situations. 19 The same is true of the preferential rights generally conferred upon existing shareholders in the event of an increase in capital.

Apart from the variety of situations encountered, one characteristiccommon to most first-refusal clauses emerges: in common with English andmost-favored customer clauses, they are usually found in situations wherethe contracting parties have relatively long-standing trading links. Varioustransactions have been carried out jointly and may still be being carriedout, and the parties will be seeking to collaborate again in the future.

C. Provisions in First-Refusal Clauses, Comparability and Verification

First-refusal clauses may be organized in a variety of ways.

(a) An initial distinction should be made on the basis of the differentpossible time sequences for offers made to B and offers made to third par-

18 Concerning first-refusal clauses as a means of solving disputes resulting fromdeadlock situations injoint ventures, cf. the chronicle of the working group on international contracts published by F. De Ly, Les clauses de divorce dans les contrats degroupement d'entreprises internationaux, I.B.LJ, 1995, pp. 299-313.

19 Cf. the national reports published with the chronicle cited in the preceding note,pp. 316-345 (Belgium: P. Hubert; France: B. Mercadal; Germany: W. Kraft; TheNetherlands: WlH. Wiggers; England: P. Ellington; Spain:]. Richter; the United States:E. Klopfer; Switzerland:]. Revaclier), as well as L. Bellodi's report on European law.


ties. In some cases, A must first offer the transaction to B before embarkingon any negotiation with third parties; in other cases, A may seek offers fromthird parties provided that he does not accept any of them before having firstoffered to enter into a contract with B on the same terms and conditions.

The following two examples illustrate these two cases:

• "Au cas ml X serait en mesure de vendre plus de 5 000 tonnes deproduits du contrat dans Ie territoire au cours d'une annee et si Yne pouvait fournir Ie tonnage supplementaire aux conditions dupresent accord, X serait alors libre d'acheter ades tiers les quantites que Y ne pourra lui fournir."

• "Subject to the requirements of Paragraph 25 hereof, if any Partyreceives a bona fide offer which it is willing to accept for the purchase of all or a percentage of such Party's undivided interest inthe License Area, from a person, firm or corporation ready, ableand willing to purchase such interest, the Party receiving said offershall give written notice thereof to each of the other Parties,including in said notice the name and address of such offeror, theprice offered and all other pertinent terms and conditions of theoffer. The other Parties, for a period of sixty (60) days after thereceipt of said notice, shall have the prior and preferred right andoption, in the ratio of the respective Percentages of Interest ofthose electing to purchase, to purchase the interest covered by saidoffer at the price and according to the terms and conditions, specified in said offer ..."

Sometimes, the two systems are found in conjunction. A must first offerthe transaction to B. If B refuses, A may turn to a third party, but beforeaccepting any offer, it must once again offer the contract to B on the sameconditions as the third party's offer.

"In case it is not decided at such date to establish the joint ventureand to proceed with its plant construction and production schedule, Y will be free to negotiate with a third party provided that,until February 28, 19 ... , X will have a priority right to be exercised within one month from the date of notice that Y intends toenter into concrete business talk with a third party for the manufacture of the product."

Some of these clauses provide that if B refuses the contract, A will befree to enter into a transaction with a third party only for a certain periodof time, after which B's preferential right revives:

"... If A fails to accept said offer or to complete said sale withinsaid period of six (6) months, the preferred right and option of B


under the preceding sub-paragraph (a) of this Paragraph 24 shallbe considered as revived, and A shall not complete said sale to saidofferor unless and until said offer again has been presented to B,as hereinabove provided, and B again has failed to elect to purchase on the terms and conditions of said offer ..."

(b) First-refusal clauses also differ as regards A's degree of freedom toseek another contracting party in the face of a refusal from B. Is A free totrade with a third party on any terms and conditions, or may A only enterinto a contract on terms and conditions similar to those which B has justrefused?

In the absence of an express provision in the clause, the problem is avery delicate one.

In one sense, it can be argued that to give A complete freedom tonegotiate with the third party would be likely to render the first-refusalclause illusory. To render B's preferential right nugatory, it would sufficefor A to offer B unacceptable contractual terms and conditions and thenoffer normal ones to the third party.

But on the other hand, would A not be subject to an unacceptablerestriction if B's refusal constrained his room for maneuver to that extentin any subsequent negotiations with third parties?

It seems that parties should be guided by the following principles inthe absence of any express provisions: A should be contractually liable if hesought to render B's preferential right illusory by proposing manifestlyunacceptable conditions to B. In contrast, where B has refused normalterms and conditions, A should not necessarily be obliged to propose identical terms and conditions to a third party, but if negotiations with the thirdparty were leading to clearly more favorable terms and conditions, Ashould make B a new offer on the basis of those modified terms and conditions before entering into a contract with the third party. These guidelines may be based on the principle of French law that contractualobligations should be performed in good faith and on the doctrine of"implied terms" in English law.

Those drafting first-refusal clauses have an obvious interest in eliminating this potential source of litigation by specifying, in express terms,what is to be the relationship between the respective terms and conditionsoffered by A to B and to third parties. Of the clauses examined, some contained solutions to aspects of this problem.

Sometimes, the clause granted complete freedom:


"If the company shall not within the period of two months aforesaid find a purchaser for the share and give notice as aforesaid, thevendor shall at any time within three months after the expirationof the said two months be at liberty ... to sell the share to any person and at any price and transfer the same accordingly ..."

Where the clause relates to the possible supply of additional quantitiesover and above those specified in a supply contract, the terms and conditions to be offered to a third party in the event of a refusal on the part ofB are not necessarily specified, but reference to the terms and conditionsof the existing contract should, as far as the prior offer to B is concerned,preclude the possibility of an unacceptable offer being made (unless theterms and conditions no longer reflect market prices at all):

"If at any time A should have a specific requirement in the Contractual Area of petroleum products other than those prescribedin Clause 5 (a) hereof B shall have the first option (to be exercisedwithin sixty (60) days of receiving due and proper notice thereof)to supply on the terms and conditions hereof. If and to the extentthat B do not exercise the option to supply, A shall be free to purchase such petroleum products elsewhere ..."

Furthermore, where the clause allows A to receive a third party's offerbefore preferentially offering to enter into a contract with B, that offerfrom a third party also provides a basis for comparison:

• "accorder a N.V. un droit de premier refus sur l'achat de laditeunite, acharge pour N.V. d'accepter les memes conditions que Ietiers acquereur ..."

• "... the other parties ... shall have the prior and preferred rightand option .. to purchase the interest covered by said offer at theprice and according to the terms and conditions specified in saidoffer."

The same applies when the clause requires A, after an initial refusal, tooffer once again to enter into a contract with B on the terms and conditions offered by a third party.

When the offer must be made to B before any negotiation with a thirdparty, it is sometimes expressly specified that, in the event that B refuses, Awill only be able to enter into a contract with the third party on the sameterms and conditions:

"Si A et B n'etaient pas d'accord sur l'ensemble des conditions etmodalites d'un contrat de distribution, A aurait alors la liberte de


proposer un tel contrat a tout autre personne, acondition cependant que A ne propose pas acette personne des clauses ou conditions plus favorables que celles offertes aB ..."

The preceding considerations show that comparability also poses aproblem in relation to first-refusal clauses, as it did for the two other typesof preferential clause examined above. If A may not enter into a contractwith a third party on more favorable terms and conditions than thosewhich it offered to B, the respective terms and conditions will necessarilyhave to be compared. In several of the clauses quoted, readers will havenoted that the wording is such that the comparison relates not only to theprice, but to the terms and conditions as a whole. However, the difficultiesin making such a comparison are well known, especially in the case of complex contracts.

There is also a problem for B when it comes to checking the terms andconditions on which A has entered into a contract with a third party afterB's initial refusal. The clauses examined by the group did not give any indication as to how this point, which would certainly be very difficult to dealwith in practice,20 should be handled.

One last thought on comparability: this question is less acute where thetransaction contemplated is not the conclusion of contract "at arm'slength" (sale, licence, etc.) but rather possible collaboration in a jointenterprise. In such case, the determining factor will be the degree of interest in the transaction, rather than the conditions of participation.

D. Procedure

Implementing a first-refusal clause calls for a procedure to be put inplace, which we will not cover in detail. As we saw in the case of English andmost-favored customer clauses, it is a matter of laying down, mutatis mutandis, the form that the various required notices is to take and the relevanttime limits: notice of A's intention to carry out the operation in question,notice of B's decision to enter into a contract with A or to refuse to do so,and, if necessary, depending on the type of clause, notice of the terms andconditions under which a third party is prepared to enter into a contract.

Many of the clauses examined by the Group failed to deal with these procedural aspects, an omission that may to give rise to practical difficulties.

However, here are two extracts from clauses that are relatively detailedas to certain procedural aspects. The first relates to the grant of a right offirst refusal to co-participants of a shareholder wanting to sell his shares.The second relates to the sale of a building.

20 For possible recourse to an independent assessor, d. infra, pp. 526-527.


• "... Any offer of shares made pursuant to Section 6.3 hereof shallbe in writing by registered letter, where feasible by airmail, shallidentify the person(s) to whom the offering Participant desires tosell shares, shall contain the terms and conditions of the offer, andshall be deemed to have been rejected if not accepted within 30days (in the case of original offers) or 15 days (in the case of subsequent offers) from the date on which such registered letter wasposted ..."

• "... The owner shall give written notice to the grantee of his desireto sell the said property and if the grantee shall within two monthsof the receipt of such notice give written notice (hereinafter calledthe option notice) to the owner of his desire to purchase the property then the following terms shall take effect."The grantee and the owner shall attempt to reach agreement onthe value of the property in the open market and with vacant possession at the time of the service of the option notice and if suchagreement has not been reached within one month from the serviceof the option notices then an independent qualified surveyor shallbe appointed to make a valuation ..."Once such valuation has been agreed or made in the mannerstated the grantee shall have one month in which to decidewhether he wants to proceed with his intended purchase of theproperty at that valuation and if he shall within that month servewritten notice on the owner of his desire to proceed then he shallbe entitled on paying the amount of the valuation to the owner toa conveyance of the property free from all incumbrances ..."If the grantee does not serve the option notice within the timeprescribed by clause 2 or if having done so he does not serve written notice within the time prescribed by and under the provisionsof clause 4 of his desire to proceed with the purchase then theowner may deal with or dispose of the property free in all respectsfrom the rights of the grantee ..."

English and most-favored customer clauses prescribe the repercussionson the contract of matching or refusing to match the terms and conditionsoffered by or to a third party. In order to avoid that the existing contractbe called into question too frequently, such clauses occasionally provide forconstraints on their application. Such problems do not arise with firstrefusal clauses, since they do not affect existing contracts but rather potential new transactions to be carried out in the future.

E. AVariation: The "Savoy Clause"

We have already noted the very great diversity of actual first-refusalclauses. The same variety is also seen in analogous contractual arrangements.


Here we will mention only the "Savoy clause," so-called because it wasonce used in a transaction relating to the Savoy Hotel in London. A, whowants to sell his shares in ajoint business must first offer it to his partner B.B may accept or refuse, but if B refuses, B is obliged to sell his own shareholding to A.2\

V. SPECIFIC LEGAL PROBLEMS

The clauses, which have just been considered, fall, in principle, withinthe ambit of freedom of contract, a fortiori, when they are included in international contracts. Their legal regime is first of all that which the partieshave determined. It is essential therefore to devote all due care to theirdrafting, and in the foregoing analysis we have attempted to highlight theprincipal pitfalls to avoid.

Three specific legal problems, however, deserve special attention: thenature of the role of the "assessor" sometimes called upon by the parties tocompare the terms and conditions on which one of them has negotiatedwith a third party, the penalties for failure to comply with the clauses, especially first-refusal clauses and the question whether these clauses are lawfulunder competition law.

A. Nature of the Role of the Independent Assessor

When we looked at English clauses and considered the problem of furnishing proof that that offer was more favorable, we suggested that onesolution might be to appoint a competent independent third party to assessthe competing conditions. 22 The problem re-emerged in connection withmost-favored customer clauses where we quoted examples of clauses providing for recourse to an assessor in order to check the terms and conditions offered to third parties. 23 One might also contemplate appointingsuch an independent assessor in the case of first-refusal clauses to verifywhether the other contracting party has not dealt with a third party onterms and conditions different from those that were rejected. 21

It is worth reflecting whether such recourse to an independent assessor should be stipulated. Various questions arise. How is the assessor to beappointed? What will be the nature and the scope of his tasks? What willthe consequences of his findings be? The clauses cited above25 are dangerously silent on those different aspects.

21 Cf. F. De Ly, op. cit., pp. 302-306.

22 Cf. SU!JTCl, pp. 497-498.

23 Cf. supra, pp. 506-507.

21 Cf. supra, pp. 518-522.

t5 Cf. SUlJTrl, pp. 498 arId 507.


As regards the assessor's task, most of the members of the group consider that it should be very limited: it is simply a matter of checking independently the terms and conditions offered by or to a third party, in orderto provide trustworthy evidence. One member pointed out, however, thatin some cases the assessor's task may be very complex, because of the difficulty of assessing whether the terms and conditions offered are equivalentand the need to carry out certain in-depth investigations on occasion.

This discussion raises the problem of the legal nature of the assessor'srole. Is such an assessor a technical expert, a contractual regulator or anarbitrator? Arbitration, as the term is usually understood, can definitely beruled out at this point, since it is not a question of deciding a legal dispute.The "contractual regulator" or "economic referee"26 does not playa partin litigation, nor in determining certain facts,27 but his role is to fill a gapin the contract, or to adapt it in the light of a change of circumstances. Hisdecision is not an arbitration award, but forms part of the contract onequal terms with the provisions that the parties themselves stipulated. 28 Isthat the role of an independent assessor? His function is the more modestone of a technical expert called upon to give the parties guidance on aquestion that is likely to affect their relationship. This could involve checking the output of a factory or the extent of an oil deposit; it could also becomparing two transactions. It is not a question of re-casting the contract,but of supplying factual information, which is necessary for the properperformance of the contractual obligations, in an independent way. Itdoes not follow, at all, from that assessment that such a task may not beparticularly delicate.

However, terminology is not yet firmly in place for this developingfield. In the new 2003 version of its Rules for expertise, the ICC defines the"expert's" main task as to make "findings" after giving the parties theopportunity to be heard and/or to make written submissions (Article 12,3°) .29 Earlier versions of the Rules on expertise stated that the parties couldexpressly confer greater powers on the technical expert, in particular thepower to recommend such measures as appear to him to be the mostappropriate in order to achieve the object of the contract or to supervisethe performance of the contract (cf. Article 6 Section 1b of the initial ruleson technical expertise issued in 1977 and Article 8 Section 1b of the revised1993 edition) ;30 the latest version does not include this addition any more.

26 Cf. supra, Chapter 9 on hardship clauses, pp. 490-491.

27 As when assessing damages when the contract is terminated: d. infra, pp. 592-593.

28 On the relationship between contract regulation and arbitration and its recentdevelopments, d., however, the discussion supra, Chapter 9, pp. 490-491.

29 ICC Rules on Hxpertise, 2003, available on www.iccwbo.org.

30 Cf. L. Kopelmanas, Le Reglement d'expertise de la CCl. D.P.C.I., 1977, pp.412-422.


The ICC rules on adaptation of contracts, issued in 197831 but withdrawn in 1994 (due to the lack of requests for application) ,32 provided forthe intervention of a third party "to fulfil the role confen-ed on him by the paTtiesin the context of theiT contTactual Telationship," which is such a broad formulathat it seemed to cover the most diverse of tasks.

As to the Guide to ICC Alternative Dispute Resolution, in its commentson Article 5,1 0 of the ICC ADR Rules,33 it states that the parties may ask the"Neutral" to provide a non-binding opinion or evaluation concerning oneor more matters"such as: an issue offact; a technical issue ofany kind; an issueof law; an issue conceTning the application of the law to the facts; an issue conceTning the interpTetation of a contractual provision; an issue conceTning the modification of a contmct."

The distinction between the role of technical expert and that of contractual regulator is not academic. As regards, inteT alia, the implications ofthe third party's findings, the ICC rules on expertise provide that" Unlessotherwise agreed by all of the paTties, the findings of the expeTt shall not be bindingupon the paTties" (Article 12), whereas the now defunct rules on contractadaptation provided that depending on the parties' choice, the third partycould either" issue a Tecommendation" or "make a final decision" (Article 11).The Guide to 1. C. C. A.D.R states that" the paTties aTe fTee to agree in wTiting thatthey will comply with a r-ecommendation OT decision of the Neutml, even though it isitself unenfoTceable" (Introduction, Characteristics, Point 4).

It is difficult to say definitely what role is played by the assessor provided for in the clauses cited above in view of their laconic nature. It seemsclear, however, in view of the foregoing considerations, that provision forrecourse to an independent third party should be made expressly when thecontract is drawn up, both as regards the specific rules, which will apply,and the scope of the third party's intervention. It would also be very desirable to specify, from the outset, how the assessor is to be appointed.

It must also be pointed out that inserting such a provision makes it necessary to consider the law applicable to the contract and the law applicableto the mode of dispute settlement, as well as the ad hoc or institutional rulesthat may be relevant.

A purely contractual qualification would not cause any difficulty in certain national legal systems, which admit such a mode of binding determi-

31 Adaptation of Contracts, ICC Publication No. 326, 1978.

32 Cf. Ph. Fouchard, E. Gaillard and B. Goldman, 'Praite de l'arbitrage cornrnercial international, Paris, Litec, 1996, p. 3l.

33 Le.e. A.D.R. Rules, 2001, and the Guide to Le.e. A.D.R, 2001, available onwww.iccwbo.org.


nation of facts or settlement of disputes, such as Belgian law (bindende derdenbeslissing) , Italy (arbitraggio) or The Netherlands (bindend advies). Suchqualification could be accepted in most situations considered in this chapter, since the independent assessor will only verify certain facts leading tothe contractual process of contract adaptation, without the third party'sintervention being in itself sufficient.

On the contrary, qualifying the intervention as arbitration (e.g., if thethird party's decision is final and leads by itself to an adaptation of the contract) would be more problematic, because few national legal systems(Bulgaria and The Netherlands are rare examples) allow arbitrators to fillcontractual gaps or, more generally, to adapt a contract.34

In spite of trends in case law apparent in many countries to broadenthe notion of arbitration in order to include gap-filling and contract adaptation, arbitrators, in practice, remain reluctant to adjust a contract. 35

Finally, we would point out that such clauses providing for settlementof contractual disputes seem to be intended, above all, to playa deterrentrole, with the main purpose of the option to request the services of an independent assessor being that the other contracting party will be dissuadedfrom acting unfairly.

B. Remedies for Infringement on the Clauses

What are the legal consequences of failing to comply with undertakings arising from the clauses that we have just analyzed?

English and most-favored customer clauses do not seem to raiseserious problems in this regard. Both types of clause involve adapting an existing contract. In the event of a dispute, either the ordinary law on contractualliability or the specific provisions of the contract should normally enable thewronged party to obtain satisfaction. Difficulties could arise, however, if adapting the contract meant that it had to be re-negotiated and one of the partiesfailed to act in good faith in the conduct of this renegotiation. On that point,we would refer the reader, mutatis mutandis, to the discussions in the chaptersdealing with letters of intent36 and hardship clauses.37

34 Unless the applicable law allows ajudge to do so in case of change of circumstances.

35 On these issues, cf. P. Sanders, Arbitration, in International Hncyclopedia ojCorn!Jaralive Law, Ttibingen, Mohr, 1996, pp. 9-13 and 67-71; B. Oppetit, TheoTle de l'ar~

bitrage, Paris, PUF, 1998, pp. 72-81.

36 Cf. supra, Chapter 1, pp. 44-48, as well as J.P. Desideri, op. cit., p. 302, about theobligation to inform the other party of the third party's offer in implementing anEnglish clause.



The situation is very different in the case of first-refusal clauses. Thoseclauses confer a preferential right for the conclusion of a new transaction.If that transaction is performed with a third party in spite of the preferential right, is there an adequate remedy to make good the opportunity whichis lost forever?

The injured party will certainly be able to claim damages from theother contracting party and possibly also from the third party who acted asan "accomplice" in bringing about the breach,38 but how is the quantum tobe determined? It will doubtless be necessary to consider the loss of thebenefits that would have resulted from the conclusion of the contract, butit may be hard to assess that loss. Moreover, financial compensation wouldoften be inappropriate in such circumstances. The only true penalty wouldseem to be the damage to the spirit of collaboration, which had hithertoexisted between the contracting parties and of which the party in breachwill suffer the consequences in the future.

What is the position when the contract with the third party has not yetbeen concluded in disregard of the preferential right, but it is about to beconcluded? At the stage where the clause has not yet been breached, is itnot possible to take action in order to prevent the breach of contract andto prevent a contract from being concluded with the third party?

The urgency of such circumstances calls for a rapid procedure, such ascommercial interim measures, which exist, for instance, in French law(Article 872 of the new Code of Civil Procedure) and Belgian law (Article584 of the Judicial Code). But does the court hearing a request for interimmeasures have the power to prohibit the conclusion of a contract with athird party and to order the party in breach to propose the transaction tothe applicant? In the absence of settled case law on first-refusal clauses, itis possible only to put forward some ideas.

Courts hearing requests for interim measures often interpret ratherstrictly the essentially temporary nature of their role. It is unlikely that acourt would agree to intervene in the way that has just been described.Nevertheless, a change seems to be emerging in the sense that courts hearing requests for interim relief are extending the scope of ordering measures they consider within their jurisdiction, and it is conceivable that acourt might provisionally forbid the conclusion of a contract with a third

38 Cf. M. Trochu, op. cit., p. 313; B. Mercadal, Contrats et dmits d'entrepTises, Paris,Francis Lefebvre, 2000, pp. 1220-1221;J.M. Mousseron, op. cit., pp. 85-86. For the liability of an "accomplice" third party in French law, see, in particular, F. Terre, Ph. Simler& Y Lequette, Les obligalions, 7th ed., Paris, Dalloz, 1987, pp. 250-270; for the positionin English law, see H. Street, The Law o!ToTls, 6th ed., London, 1976, pp. 336-347.


party on condition that the main proceedings are brought within a certaintime limit. 39

In French and Belgian law, however, the injured party would have nospecific remedy in the event of failure to comply with an order of the president of the court, save that it could probably expect a better chance ofbeing awarded damages by the court hearing the main proceedings. Onthe other hand, even if the party in breach did not, in fact, conclude a contract with the third party, could it be compelled to offer the contract to itspartner or even to conclude a contract with that party? Whether the obligation is to enter into negotiations or to bring them to a successful conclusion, an order for specific performance seems out of the question and theother contracting party will here again only be in a position to sue for damages. The case might be different if there were already a full contractualproposition; a court might find, in such a case, that this constituted an offerthat, if the other contracting party had accepted it, would thus result in itsbeing transformed into a contract, with the judgment setting the seal on it.But how viable would a contract be if it were "concluded" under such circumstances?

It appears then that damages seem to be the only possible sanction forbreach of a first-refusal clause under French and Belgian law, though wehave noted the difficulties in assessing the quantum of such damages, aswell as how inappropriate they are as a remedy.

Under English law, however, the courts' powers to grant injunctionscould prove very useful where there is a threatened breach of a first-refusalclause.

We know that when a contractual obligation has not been performed,in principle, the common law only enables courts to award damages.Equity, on the other hand, allows the courts, in certain circumstances, toorder specific performance or to grant an injunction.40

An injunction is an order made by a court, addressed to one or severalspecific parties, requiring them, to abstain, in general, from doing something (prohibitory injunction), or less often to perform a specific action(mandatory injunction). The court does not necessarily grant the injunction requested. It has very broad discretion.

39 On such an evolution in Belgian and French law, cf. X. Dieux, La formation, I'execution et la dissolution des contrats devant Ie juge des referes, note under Trib. Liege(ref.), February 2,1984, &v. Crit.Jur: B., 1987, pp. 250-270; J.P. Desideri, Of). cil., 408.

40 See J. Beatson, AnsonsLaw of Contract, op. cit., 27th ed., pp. 600-603; r.c.F. Spry,The Principles ofHquitable Remedies, 1984, pp. 312-352; R. David & D. Pugsley, l"es contratsen droit anglais, 2nd ed., 1985, Nos. 439-467.


It is, however, usual for an injunction to be granted where there is athreatened breach of an obligation to refrain from acting, which may correspond to the first-refusal situation. Nevertheless, the wording of theclause will be important. If party A has undertaken not to deal with X without having first offered the contract to party B, that is an express case of anobligation to refrain from acting and may lead to the issue of an injunction.English courts sometimes also recognize the existence of implicit obligations to refrain from acting, as in the case of a clause whereby A undertakesto give B a right of first refusal if A decides to carry out a particular transaction. 41 But the interpretation of the clause must be sufficiently clear. Ifthe known circumstances do not enable its exact scope to be determined(for example, whether the clause allows or does not allow A to solicit offersfrom third parties in the first instance), the injunction will not be granted,since the court must be able to determine exactly which acts are proscribed. Neither do English courts appear to be prepared to grant injunctions where the first refusal relates to generic goods, or where the measurewould be to the detriment of a third party acting in good faith. However, ifthe third party knew of the existence of the clause, which A was preparingto disregard, the court will not hesitate to grant an injunction to restrainthe conclusion of a contract or even, it appears, to prevent performance ofa contract which has already been concluded.

Injunctions are extremely efficient, since a party who does not complywill be guilty of contempt of court and, as such, open to heavy penalties:imprisonment, fines, sequestration of property.12

Another problem must also be taken into account it is often necessary to act veryquickly to prevent the contracting party seeking to act unfairly from treating with athird party. For these situations, there is in English law a procedure similar to Frenchor Belgian commercial interim measures. It is possible to obtain an interlocutoryinjunction urgently if the conditions for granting an ordinary injunction appear tobe met and on condition that the wronged party immediately bring proceedings onthe substantive case against the party in breach. In some cases, the court may renlseto grant an interlocutory ~unction if it considers that it would be apt to cause irremediable damage to the party against which it would be granted.43

C. Validity of the Clauses With Regard to Price Determination

Under French law, English clauses, and probably also most-favored customer clauses, may be affected by the restrictive position taken by courts asto the requirement of price determination. In a first stage, the COUT de

41 Cf. JVIanchester Ship Canal Co. v. Manchester Racecourse Co. [1901] 2 Ch. 37.

42 Cf. LG.E Spry, op. cit., pp. 354-356.

13 fri., pp. 430-482.


Cassation had ruled that the object of a contract had to be determinableand could not depend on the discretion of one single party.11 With the fourdecisions rendered by its plenary assembly on December 1, 1995,45 theCourt now seems to distinguish between frame contracts, where one partymay set the price unilaterally (without making the contract void, but undera posteriori court control), and individual sales contracts governed by Article1591 of the Civil Code, which appears to prohibit unilateral price determination.16

Such an issue appears to be mainly a problem under French law, butcertain Central and Eastern European countries, as well as some developing countries, are also hostile to contracts where the price is left to laterdetermination by one of the parties.17 Many other countries (e.g., the common law countries, but also Belgium, The Netherlands and Germany) havemore flexible solutions as far as price determination is concerned.48

The following case, involving an English clause, illustrates some difficulties encountered under French law.

An exclusive supply contract provided that, each year, the buyer wouldnotify the provisional quantity of its orders, and the seller would indicatethe price of its supplies. But the buyer was allowed to inform the seller of

44 Cf.J. Ghestin, Le amtraJ, Paris, L.G.DJ., 2nd ed., No. 516-532.

45 Cass., December 1,1995, concl. M.Jeol, note L. Aynes, Dall., 1996, 13.

16 Cf. S. Valory, loa potestativite dans les relations contractuelles, Aix-en-Provence, Pressesuniversitaires d'Aix-Marseille, 1999, pp. 309-324; B. Mercadal, Contrats et dmits d'entreprises, Paris, Francis Lefebvre, 2000, pp. 297-298; V. Heuze, La vente internalionale dernarchandise, Droit unijorrne, Paris, L.G.DJ., 2000, p. 152.

17 Cf. C. Witz, Les premieres applications jurisprudentielles de la Convention deVienne sur la vente internationale de marchandises, in The unification of international cornrnerciallaw, F. Ferrari (ed.), Baden-Baden, Nomos, 1998, pp. 165-167, who describes thefamous Malev v. Pratt and Whitney case, where the Supreme Court of Hungary avoideda contract for lack of price determination.

48 Cf. D. Tallon, La determination du fJTix dans les contraJs (etude de dmit COTnf)(Lre), Paris,Pedone, 1989, 148 pp.; 1. Corbisier, La cIetermination du prix dans les contrats commerciaux portant vente de marchandises. Reflexions comparatives, Rev. Int. Dr; Cmnp.,1988, pp. 767-832. Cf. also Article 55 of the Vienna Convention on the InternationalSale of Goods (CISG), in connection with article 14. There is a well-know controversyconcerning these two provisions. (d. V. Heuze, Of). cit., pp. 145-151), with two conflicting interpretations. A first theory claims that Article 55 prevails on Article 14, withthe consequence that in an international sale, Article 55 would be applicable withouttaking the restrictive position of French law into consideration. The flexibility of thatsolution is evident, but it implies judicial intervention in case of abuses. The other thesis gives priority to Article 14; with this approach, the lex contractus (in many cases, theseller's) would apply to the issue of validity of price determination by one party-notCISG. The latter opinion tends to protect the buyer against arbitrary price determination by the seller.


more favorable prices offered by competitors, in which case the seller couldeither align his price or waive his right to supply for the year concerned.

The Court of Appeals of Paris avoided the exclusive supply contract,because price determination was left to the seller's discretion. Could not theEnglish clause give an objective basis for such determination? The Court isof a different opinion: implementing the clause will necessitate a new meeting of the parties' minds, e.g., to identify the competing firms whose offerscould be accepted as references.49 The COUT de Cassation refused to annul thedecision.50

This decision does not condemn English clauses peT se, but it considersthat in the case under review, implementation measures did not allow forsufficient price determination. However, considering the difficulties, mentioned above, concerning the comparison of competitive offers, one canexpect that it will rarely be the case.51 Similar observations can probably bemade about most-favored customer clauses.

As a conclusion, drafters of international contracts must be aware thatin the present state of French law, unilateral price determination remainsa delicate issue when dealing with a sales contract. More generally, it isalways advisable to verify the validity of open price contracts under theapplicable law.;")2

D. Validity of the Clauses With Regard to Competition Law

What is the validity of the clauses that we have just considered withregard to competition law?

On the one hand, an English clause enables the pressure of competition to affect the terms and conditions of a long-term contract and a mostfavored customer clause can be a weapon against certain discriminatorypractices. But, on the other hand, those clauses make it easier for lastinglinks to be maintained between partners. First-refusal clauses, for their part,restrict freedom to trade with third parties; their effects may be similar tothose of an exclusive-dealing clause.53

19 Paris, May 2, 1986,jur. Cl. Per., 1986, II, 20622, note]. Ghestin.

50 Cass., june 24, 1988, Dall., 1989,j, 89, note Ph. Malaurie; M. Trochu, ofl. cil., p. 317.

51 Cf. B. Mercadal, Contrats et dmits d'entreprises, Paris, Francis Lefebvre, 2000, p. 299.

52 Cf. P. Amato, U.N. Convention on contracts for the international sale of goodsthe open price term and uniform application: an early interpretation by the Hungariancourts, 13]ourn. L. and Corn. 1993, p. 22; ].M. Klotz and Barrett, International sales agree'!ftents, the Hague, Kluwer Law International, 1998, p. 8l.

53 Cf. the decision of Court of justice of the European Communities rendered onNovember 17,1987, in the Philifl Morris case, 142 & 156/84, E.C.R 1987,4487.


It is notorious that, by its nature, competition law does not lend itselfto hard and fast judgments. It is not possible to establish whether a clauseis lawful from simply reading it, its actual economic effect must be assessed.In that respect, European law has gone through interesting developments,which we will briefly report.51

With regard to Article 81 of the European Union Treaty (formerlyArticle 85 of the Treaty of Rome), the English clause has been appraiseddifferently depending on the circumstances.

In the case of the Dunlop/Pirelli mutual supply contract, such a clausewas applied to mutual preferential undertakings concerning additionalorders. The European Commission found no prohibited restraint of competition: the clause did not prevent from freely soliciting offers from competitors, and it hindered the possibility of setting excessive prices.ss

However, in two subsequent cases, the Commission reached differentconclusions. The conditions of the English clause, included in the long-termsupply agreement BP-Kemi/DSF, were deemed to be too limited and toorestrictive to give any useful flexibility to the exclusivity agreement.S6 In therolled zinc products and zinc alloys case, the Commission decided that anEnglish clause accepted by Cram to the benefit of Prayon, in an exclusivesupply agreement, amounted to a restriction of competition, increasing thebuyer's dependence, due to the respective sizes of the firms involved.57

Regulation 1984/83 ofJune 22, 1983, concerning the application ofArticle 85 Section 3 to categories of exclusive purchasing agreements, provided that brewery contracts had to allow the distributor to purchase otherdrinks than the beer that was the object of the agreement from third parties, when these third parties offered more favorable terms and the brewery did not match such terms (Article 8, 2° b) .S8 Regulation 1984/83 wasabrogated as ofJune 2, 2000.

The new European rules on categories of vertical agreements and concerted practices, introduced by Regulation 2790/1999 of December 22,1992,59 contain general provisions applicable to all types of vertical agreements (except for the sectors of automobiles, agriculture, insurance and

54 For more details, cf.J.M. Desideri, op. cit., pp. 111-118.

55 Decision of December 5,1969, OJ.H.C, 1969, L. 323/2l.

56 Decision of September 5, 1979, OJE.C., 1979, L. 286/32.

57 Decision of December 14,1982, OJE.C., 1982, L. 362/40.

58 OJ.J<"'.C,june 3,1983, L. 179/5.

59 O:JE.C., DeceIIlber 29, 1999, L. 336/21.


transport). In its Guidelines on Vertical Restraints,60 the Commission makesthe following observations concerning English clauses:

"(152) A so-called "English clause," requiring the buyer to reportany better offer and allowing him only to accept such an offerwhen the supplier does not match it, can be expected to have thesame effect as a non-compete obligation, especially when thebuyer has to reveal who makes the better offer. In addition, byincreasing the transparency of the market it may facilitate collusion between the suppliers. An English clause may also work asquantity-forcing ... Quantity-forcing on the buyer will have similar but weaker foreclosure effects than a non-compete obligation.The assessment of all these different forms will depend on theireffect on the market."

Most-favored customer clauses have also led to certain decisions by theCommission on the ground of Article 81.

In the Kabelmetal/Luchaire case, the former company had undertaken not to grant patent licences to other firms at more favorable conditions than those granted to Luchaire. The Commission ruled that underthe circumstances, the clause did not deter the licensor from subsequentlygranting licences to third parties. But it stated that in particular situations,especially when the state of competition in the market at a given time wassuch that it was no longer possible to find other licensees without offeringthem much more favorable terms than those offered earlier, such an obligation could, in fact, hinder the granting of future licences and thus constitute a significant restriction to competition. 61

In the rolled zinc products and zinc alloys case, these principles wereapplied to the most-favored customer clause also included in the Cram/Prayon agreement. 62

On the other hand, Article 2 Section 1, 100 of Regulation 240/96 onthe application of Article 85 (3) of the Treaty to certain categories of technology transfer agreements considers as "generally not restrictive of competition ... an obligation on the licensor to grant the licensee any morefavorable terms that the licensor may grant to another undertaking afterthe agreement is entered into."63

60 OJ.H.C., October 13, 2000, C 291/l.

61 Decision ofJuly 18,1975, OJE.c., 1975, L. 222/34.

62 Decision of December 14, 1982, cited above at note 57.

63 OJ.H. c., February 9, 1996, L. 31/2. This regulation has replaced the earlier Regulation 2349/84 ofJuly 23, 1984 on patent licenses (OJE. c., August 16, 1984, L. 219/15),which contained an identical provision.


A possible control of most-favored customer clauses has also beeninstalled by Regulation 2790/1999 of December 22, 1999 on vertical agreements. According to Article 4 a), the exemption shall not apply to verticalagreements that, directly or indirectly, in isolation or in combination withother factors under the control of the parties, have as their object therestriction of the buyer's ability to determine its sale price.54 At No. 47 of itsGuidelines on Vertical Restraints, the Commission stated that"... indirectprice fixing can be made more effective when combined with measureswhich may reduce the buyer's incentive to lower the resale price, such as ...the supplier obliging the buyer to apply a most-favored-customer clause. "6:)

On the other hand, Article 82 of the European Union Treaty (formerlyArticle 86 of the Rome Treaty) also served as a basis for decisions concerning English clauses. This clause was retained by both the Commissionand the Court of Justice among the elements making the conduct ofHofman-Laroche an abuse of economic power. (j(j The Court agreed that theclause allows remedying some unfair consequences of exclusive supplyundertakings. But it may also increase the abusive character of a dominantposition by its restrictive implementation measures and the informationundertakings it implies. The Guidelines on Vertical Restraints confirms thiswhen indicating that Article 82 "specifically prevents dominant companiesfrom applying English clauses or fidelity rebate schemes" (No. 152 infine).67

Care will thus be taken, depending on the circumstances, to verify thecompatibility of the clauses under discussion with competition law.

VI. FINAL CONSIDERATIONS

Although each of the three clauses examined has its own particular features, they also have many in common. The similarities, which were mentioned at the beginning of this review, have emerged clearly throughout thesubsequent analysis. We would particularly like to emphasize that the threeclauses are characteristic of the existence of long-standing economic relations between parties.

64 This does not exclude the possibility for the supplier to set a maximum or torecommend a sale price, provided that this does not amount to a fixed or minimumsale price as a result of pressure from, or incentives offered by, any of the parties (Art.4a) in fine).

65 OJE.G., October 13, 2000, C 291.

66 Decision of the Commission, June 9, 1976, OJ.H.C, 1976, L. 223/27; Court ofJustice, February 13, 1979, E.C.R, 1979, 46l.

67 OJE.G., October 13, 2000, C 291. In France, the Conseil de la conCUTrence decidedin 2003 that most-favored insurer clauses stipulated when setting up a co-insurancescheme can have an anti-competitive effect (l/Argus de l'assurance, May 14, 2004, p. 45).


English clauses, most-favored customer clauses and first-refusal clausesare not without their dangers. There are many pitfalls to avoid in theirimplementation. The risk of offers of convenience may distort the operation of English and first-refusal clauses. The difficulties in effecting checksmay make most-favored customer clauses and first-refusal clauses nugatory.The fact that sanctions are rather inadequate, means that first-refusalclauses have to depend on the probity of the other contracting party.Negotiations with a third party may be made very difficult if the third partylearns that, before a contract is concluded, the other contracting party willoffer preferentially the terms and conditions on which agreement has beenreached to another party with whom it has signed an English clause or afirst-refusal clause. In every instance, the problems of comparability andproof give cause for concern. In some jurisdictions, price determinationmay be a problem. In each case, a check must be made to be sure thatclauses are lawful under the rules of competition law.

On the economic level, moreover, it appears that English clauses andmost-favored customer clauses are, for the most part, stipulated, almost asstandard clauses, in periods of relative price stability.58 When prices arefalling, the operation of such clauses is apt to hit hard those parties who arecompelled to reduce their prices, in particular where such clauses havebeen systematically incorporated into connected contracts (for example,licensing contracts).

Thus, a warning for negotiators emerges from this analysis. There is aninterest in concluding first-refusal clauses, English clauses and most-favoredcustomer clauses, but they should be worded with the greatest caution inview of the drafting difficulties described in this review and of the riskswhich have just been called to mind.

liS These clauses are rarely encountered in sectors of the economy where marketconditions are always in fluctuation, for example in the shipping industry.

By contrast, hardship clauses are a characteristic feature of contracts concluded inperiods of economic instability.

CHAPTER 11

ASSIGNMENT CLAUSES

I. WORKING METHOD

True to its objectives, the Working Group looked at assignment andtransfer and synonymous clauses in international commercial contractsfrom the perspective of international contract draftsmen. On the basis ofdiscussions and analyses of sample clauses provided by its members working in the legal or contract departments of companies or working in private practice, I general trends and problems regarding these clauses wereobserved. This chapter attempts to provide a summary of the discussionsand analyses. The various elements of these clauses are emphasized and aregiven extensive attention. The disadvantage is that these elements aremuch isolated from one another and that their intrinsic links are insufficiently stressed. To fully understand assignment clauses, one should takean overall perspective of assignment clauses including their various elements, other contract clauses2 and the factual background of the circumstances in which these clauses have been or should be used.

Also, attempts to classifY assignment clauses (see Sections IV.F throughIVI) may create the false impression that all assignments clauses fall withinone of these categories. However, classification only seeks to better understand the various options available to contracting parties; it does not intendto be comprehensive.

Finally, one should note that assignment clauses in international commercial contracts tend to be standardized, to a certain extent, since theircontents and wordings are often very similar from one contract to another.To some degree, one might characterize assignment clauses as boilerplate

1 Also, the following assignment clauses contained in international instruments maybe mentioned: Article 27 of the ICC Model Commercial Agency Contract, ICCPublication No. 644, Paris, ICC Publishing, 2002; Article 26(4) of the ICC ModelDistributorship Contract, ICC Publication No. 646, Paris, ICC Publishing, 2002; ChapterXXVII (Transfer of contractual rights and obligations) of the Legal Guide on DrawingUp International Contracts for the Construction ofIndustrial Works, UNCITRAL, U.N.Sales No. E.87.v.10, Doc. A/CN.9/SER.B/2, 1987.

2 See, for instance, the relationship between assignment clauses and terminationclauses mentioned by J.M. Mousseron (Technique wnlTar;luAle, Paris, Lefebvre, 2nd ed.,1999, pp. 229-230). In those cases, the transfer of the contract by the assignor entitlesthe obligor to terminate the contract in order to avoid contractual relationships with theassignee.

537


clauses that are copied from one contract to another not only within thesame company or law firm but also across the legal profession.

II. INTRODUCTION AND DEFINITIONS

Assignment of rights (often but not always of accounts receivable) andtransfer of contracts are important in business life. Since business relationships are increasingly concluded on a more impersonal basis (intuitu pecuniae), transfers of rights and of contracts occur frequently and for variousreasons (e.g., collection of money claims, sales of receivables and, in relation to financing, as an instrument of vesting security interests). Corporatere-structuring often involves issues as to the transfer of contracts and assignment of rights (e.g., mergers and acquisitions, demergers, asset sales). Thus,the primary focus of the analysis is the question of how international contract drafting dealt with the various elements of these problems.3

Before discussing the scope of this chapter, some terminological indications should be given. Regarding both assignment of rights and transferof contracts, assignor and assignee will be used as legal terms of art to indicate the party who assigns the rights or transfers the contract and the partyto whom such a transfer is made. This terminology conforms to the expressions generally used in assignment clauses. Designating the party whoseobligations are being transferred, in the case of an assignment of rights, orwhose rights and obligations are transferred, in the case of a transfer ofcontract, is more complicated. Assignment clauses generally have no standard vocabulary to indicate that party. In the field of assignment of rights,the term debtor (in French le cede-debitor cessus) is used. This term is usedthroughout this chapter in order to express the assignor's counter-partyunder the original contract in a situation of assignment of rights. In thecase of transfer of contract, the term obligorwill be used.

Assignment of rights and transfer of contracts are both well known ininternational business life. As to the law on assignments, many civil lawcountries have statutory rules on assignment of rights. These rules generally deal with the relationships between assignor, assignee and debtor as tothe assignment of rights. Those rules determine the assignability of rights,the rights and obligations between assignor and assignee, the warranties ofthe assignor vis-it-vis the assignee, the rights of the assignee vis-it-vis thedebtor and the formal requirements for the assignment to become effective vis-it-vis the debtor and other third parties, the obligations and protec-

3 See on this subject: ].M. Mousseron, op. cit., pp. 215-235; A.G.]. Berg, DraftingCmmnercial Agreements, London, Butterworths, 1991, pp. 174-176; R. Christou, Boiler!JlatePnu;tical Clauses, London, Financial Times Law & Tax, 2nd ed., 1995, pp. 189-190; L.Aynes, Les clauses de circulation du contrat, in Les principales clauses des contrats conclus entrepmJessionnels, Aix-en-Provence, Presses Universitaires d'Aix-Marseille, 1990, pp. 131-139.

Assignment Clauses • 539

tion of the debtor (debitor cessus) vis-a-vis the assignee. Transfer of contractsis generally not covered by legislation in civil law jurisdictions1 and hasbeen developed, in practice, where various methods are used. In thisrespect, the crucial point is that the transfer of the contract does requirethe consent of the obligor because debts are generally not transferable.Giving the original creditor a new debtor as a result of the transfer of thecontract (substitution of debtors) thus requires the consent of the obligor.Many assignment clauses will provide for rules and procedures in order toobtain the original creditor's consent.5 In common lawjurisdictions, transfer of contracts raises the same problem as in civil law countries. Only thebenefits of the contract are in principle assignable, whereas the burdenmay only be transferred with the consent of the creditor. The latter situation will then result in a novation (i.e., a new contract between the assigneeand the creditor). (j

III. SCOPE OF THE CHAPTER

Because of the vast range of issues regarding assignment of rights andthe transfer of contracts, some restrictions had to be made to limit thescope of this chapter. First, the analysis dealt only with general problems ofthe law of obligations regarding assignments. Special contracts or rightsthat, under the applicable law, may be affected by special considerations orare governed by specific provisions (e.g., employment contracts,7 insurancecontracts, intellectual and industrial property rights, arbitration agreements,S negotiable instruments9 and securities lO ) were not included in the

1 Exceptions are Italy (Articles 1406-1410 CC), Portugal (Articles 424-427 CC) andThe Netherlands (NBW, Article 6:159).

5 Differences in terminology between various jurisdictions regarding assignment ofrights and transfer of contracts is a factor that to a large extent complicates activities inthese fields.

6 See on English law regarding this topic, Linden Gardens Trust Ltd v. Lenesta ShulgeDisposals Ltd and others [1993] 3 All E.R. 417 (House of Lords).

7 In the European Union, one may refer to Directive 77/187 of February 14,1977(OJ L. 61, March 5,1977,26-28) on the approximation of the laws of the member Statesrelating to the safeguarding of employees' rights in the event of transfers of firms, businesses or parts of businesses as well as to the extensive case law of the European CourtofJustice regarding the interpretation of this Directive and the recent Council Directive2001/23/EC of March 12,2001 on the approximation of the laws of the member Statesrelating to the safeguarding of employees' rights in the event of transfers offirms, businesses or parts of firms or businesses (OJ L. 82, March 22, 2001, p. 16).

S E.g., under French law, Ph. Delebecque, La transmission de la clause compromissoire, Rev. Arb., 1991, pp. 19-32.

9 E.g., forfaiting.

10 In this latter respect, one may refer to the trends in modern financial techniquesto express debts in securities (securitization-titrisation).


analysis. Legal techniques such as subrogation, delegation and novation orlegal problems having features akin to assignment (e.g., sub-contracts inmulti-party contractual settings) were equally excluded from extensive andexpress review, albeit that their relation with assignment clauses will brieflybe discussed (see Section IV.E). Furthermore, competition law (includingmerger law) aspects of assignment clauses are not covered in this chapter,notwithstanding their importance and the frequency of competition-Iawsensitive provisions in assignment clauses. Finally, the analysis was restrictedto clauses in international contracts regulating assignments thus excludingthe contract of assignment itself between assignor and assignee. Thus, onlyclauses about assignment and not assignment contracts I I were looked into.It was generally felt that the project could be achieved without the need fornational reports or reports on international instruments regarding assignments. This is primarily due to the fact that contract clauses regardingassignment, by their very nature, make attempts to regulate the relationships between the contracting parties and generally, under applicable laws,may not effectively regulate the position of third parties. Assignor anddebtor/ obligor may thus regulate their respective rights and obligationswell in advance by contract in case of subsequent assignment (but they cando no more than set certain parameters affecting interests of third partiessuch as the assignee's). The latter will then be determined by the rulesapplicable to the relationships vis-it-vis the third party.12 Consequently, the

11 Generally, the relationship between assignor and assignee has been excludedfrom the analysis. This relationship may stem from a specific assignment contractbut may also originate from a framework contract as is the case in bulk transfers(e.g., factoring).

12 In the European Union, the conflict of laws problem will be governed by theRome 1980 Convention on the Law Applicable to Contractual Obligations (OJ L. 266,October 9, 1980, pp. 1-19) and, in particular regarding assignments of receivables, byArticle 12 of that Convention.

As to substantive rules applicable to assignments, one should distinguish betweeninternational instruments uniforming the law on assignment and national law. In respectof the former, mention should be made of the 1988 Unidroit Convention signed inOttawa on May 29, 1988 regarding international factoring. This Convention entered intoforce on May 1, 1995 in France, Italy and Nigeria (Unidroit News Bulletin, No. 99/100,July/October 1994, p. 7) and may also be relevant for debtors in third countries in viewof the Convention's provisions on the scope of application. Also, one may note the 2001Uncitral Convention on the Assignment of Receivables in International Trade which hasnot yet come into force.

The 2004 Unidroit Principles on International Commercial Contracts (Chapter 9)and the Principles of European Contract Law (Chapters 11 and 12) also contain ruleson assignment of rights and transfer of contracts.

Regarding national law on assignments, one may note the following literature: Latransmission des obligations, IX Journees cl'etudes juridiques Jean Dabin, Bruylant,Brussels, 1980,748 pp.; Ph. Reymond, La cession des contrats, Lausanne, Cedidac, 1989,125 pp.; H. Katz, Rights of Third Parties, Third Party Beneficiaries and Assignment,


following issues regarding assignment law are not dealt with in assignmentclauses in international contracts:

1. the assignability of the rights under the applicable law;2. the rights and obligations between assignor and assignee;3. the warranties of the assignor vis-it-vis the assignee;4. the rights of the assignee vis-it-vis the debtor/0bligor;5. the obligations and protection of the debtor/obligor vis-it-vis the

assignee;6. the priorities of the assignee over prior or subsequent assignees

and the creditors of the assignor; and7. the conflict rules regarding the relationship between the assignor

and the assignee and that between the assignee and the debtor/obligor.

IV. ANALYSIS OF ASSIGNMENT CLAUSES IN INTERNATIONAL CONTRACTS


Assignment clauses are primarily concerned with the intervention ofthird parties in the contractual relationships between the original contracting parties. Maya third party assume part or all of the rights of oneof the contracting parties (assignment of righ ts), or maya third party notonly become creditor but also debtor under the original contract (transferof the contract)? In this respect, traditional concepts of contract lawinstruct us that some contracts are concluded intuitu personae (as opposedto contracts intuitu pecuniae) and thus, parties may, in effect, impose thischaracteristic by introducing restrictions as to the assignability of the contractyl This rule raises the question as to the definition of contracts concluded intuitu personae. 11 Generally, one might say that these contracts areconcluded on the basis that the identity of at least one of the contractingparties is essential to the formation and performance of the contract. The

InternationalEnLyr;[o!Jerlia q!Cmn!Jarative Law, Vol. VII, Chapter 13, Ttibingen, Mohr, 1992,102 pp. See also R. Goode, Assignment Clauses in International Contracts, I.B.LJ 2002,pp. 389-406.

13 This traditional concept is sometimes challenged on the basis that contracts arein principle transferable and that, therefore, intuitus !Jersonae is to be understood restrictively. Consequently, restrictive assignment clauses should also be interpreted restrictivelyand many assignment clauses are to be interpreted in the sense that they do not prohibitthe transfer of the contract but rather impose the conditions for making the assignmenteffective. In that view, judges or arbitrators ultimately would determine the conditionsfor the transfer (see L. Aynes, lor;. cit., pp. 134-136). This opinion may be questionedin so far as it relates to economic transactions where party autonomy prevails. A fortiori,one might doubt whether it may be applied to international commercial transactions.

11 See Ph. Marchandise, Le changement de cocontractant dans les contrats aprestations successives, in La vie flu r:ontrat (1 !Jrestations successive,I', Brussels, 1991, pp. 149-157.


identity of the contracting party may relate to subjective factors (e.g., confidence) but also to objective parameters such as technical, commercial orfinancial qualities.

In this respect, assignment clauses are examples of the intuitu personaecharacter of the contract. They avoid the uncertainties related to a judicialdetermination of the character of the contract. In this respect, assignmentclauses very often tend to protect and guarantee the original positionbetween the contracting parties by not allowing any changes at all in theparties brought together by the contract (see Section IV.R.2. no-assignmentclauses) or by restricting assignment (see Section IV.R.3 restrictive assignment clauses). Therefore, contracts with assignment clauses are generallyto be interpreted as contracts concluded intuitu personae. The oppositestatement (i.e., contracts without assignment clauses are not concludedintuitu peTSonae) is not correct because a judge or arbitrator may well findthat a contract, which does not contain an assignment clause, has beenformed intuitu personae and is therefore not as such assignable. Assignmentclauses, thus, are indications of the intuitu personae character of the contractand furthermore do provide for a contractual regulation of the effects ofsuch a characterization in the transfer of the contract. The assignmentclause has a double function: (1) it characterizes the contract as intuitu personae; 15 and (2) it regulates assignment as to its requirements, proceduresand effects. This chapter will primarily discuss the second function. As tothe first function, assignment clauses may thus well affect other contractualclauses and, more generally, the contractual relationship between the parties (for instance, interpretation or performance of contractual obligationsby subcontracting or by delegation).

Assignment clauses sometimes refer to this basic underlying philosophy. Three clauses follow:

• "This Agreement shall be personal to the parties to it save that ...the benefit of any of its provisions may be assigned to any companywhich is a subsidiary of the party concerned or which is a holdingcompany of such party or a subsidiary of such holding company ..."

• "This Agreement is personal in nature and the parties' rights hereunder cannot be assigned, nor can the performance of their dutiesbe delegated without the prior, written consent of the other party,such consent not to be unreasonably withheld."

15 Contractual characterizations will only have a limited effect if public policy ormandatory rules are concerned. In other situations, differences of opinions exist as tothe question whether a characterization by the parties in a contract is binding uponjudges or arbitrators. In France, this debate is influenced by Article 12, paragraphs 1 and2 of the Nouveau Code de Procedure Civile (NCPC). For more details, see Chapter 3, p. 126.


• "This Agreement is a personal one, being entered into in relianceupon and in consideration of the singular personal skill and qualifications of the Consultant. The Consultant shall therefore not voluntarily or by operation of law assign or otherwise transfer theobligations incurred on its part pursuant to the terms of thisAgreement without the prior written consent of the Company."

In the first case, the clause does not expressly mention that assignmentother than to affiliates is prohibited, while the two latter clauses provide thebackground of the clause and determine as well the legal consequences asto assignability.

These clauses raise the question whether the assignment clause shouldnot only outline the conditions, procedures and effects of assignment butalso whether the rationale for restricting assignability should be expressed.Most clauses do not expressly state the fact and the reasons for the intuitupeTSonae character of the contract. The aforementioned clauses are, in thisregard, quite exceptional. A more general expression of the intuitu personaecharacter of the contract in the assignment clause is certainly advisable ifthat character is strong, and one would want to emphasize that characterthat may reinforce the above-mentioned first function of assignmentclauses and have effects in other cases than assignment situations. On theother hand, if one were to prefer limiting the scope of the assignmentclause to assignment-only situations, one may consider not expressing theintuitu personae character in the assignment clause.

Assignment clauses generally deal with a number of issues. However,some problems have hardly been regulated at all in the assignment clausesthat have been analyzed. These problems relate to:

1. the purposes of assignment;2. the distinction between assignments of existing rights and assign-

ments of future rights;3. the distinction between individual assignments and bulk assignments;4. the form of assignment;5. waiver of defenses by the debtor/obligor;6. subsequent assignments; and7. conflict rules between assignor and debtor/obligor.

As to the purposes of assignment, one clause provided for compulsoryassignment on the part of a contractor of his contracts with suppliers andsub-contractors in case of termination or discontinuation of the contract toenable the other party to finish the works:

"Contractor shall arrange that any rights and titles (together withthe obligations connected therewith) relating to Work which


Contractor may directly or indirectly acquire vis-a-vis third partiescan, if so required by Company, be assigned to Company in theevent of discontinuation due to Contractor or termination of theContract as referred to in articles 16 and 17 respectively."

In another case, the assignment clause purported to enable the buyerof an aircraft to assign the contract to a financial institution engaged in thefinancing of the purchase. One may assume that the assignment of the contract to the financial institution was intended to convey a security interestto that institution. Finally, another clause stated that assignment of a party'sinterests in a contract was permissible by way of pledge, in its ordinarycourse of business, to a bank or a financial institution.

Assignment clauses in international contracts are-to the extent thatArticle 12 (2) Hi of the Rome Convention on the Law Applicable to Contractual Obligations)7 is applicable-to be governed by the law applicableto the contract as to the relationship between the assignor and the debtor.Many international commercial contracts contain a choice-of-Iaw clause,and the law thus designated will apply. In this respect, one may note thatthe assignment clauses studied did not themselves refer expressly or implicitly to the law thus chosen,18 leaving the issue to the boilerplate clause onapplicable law.

Hi This provision reads as follows: "The law governing the right to which the assignment relates shall determine its assignability, the relationship between the assignee andthe debtor, the conditions under which the assignment can be invoked against thedebtor and any question whether the debtor's obligations have been discharged."

17 This Convention is applicable in 12 of the 15 European Union member States.Conventions providing for the accession of Austria, Finland and Sweden and of the tennew member States to the Rome Convention have not yet entered into force. One maynote that Austria and Finland have already legislation that conforms to a large extentwith the provisions of the Rome Convention.

IS The applicable law may, for instance, be relevant in relation to the effectivenessof clauses prohibiting assignment (no-assignment clauses) or requiring the debtor's consent to assignment (reslrir;ti1Je assignmenl clauses). This may be relevant since countrieshave various attitudes towards the possibility for contracting parties to prohibit or restrictassignment of rights. In some countries, party autonomy governs and assignments madein violation of no-assignment or restrictive assignment clauses may be held unenforceable (e.g., Germany: Section 399 BGB-pactum de non cedendo but not in commercialtransactions Section 354a HGB); Austria: OGH, Juristische Blatter, 1984, 311; England:Linden Gardens Trust Ltd 1J. Lenesta Sludge Disposals Ltd and others [1993] 3 All E.R. 417[House of Lords]). In other countries, interest in receivables financing prevails whichleads to legal rules rendering no-assignment or restrictive assignment clauses ineffective.For instance, one may note that in the United States no-assignment clauses in contractsare ineffective under UCC Section 9-318 (4). This position has been followed by Article6 of the 1988 Factoring Convention. This Convention has entered into effect and isapplicable in France, Italy, Nigeria, Hungary, Latvia and Germany. However, since thenegotiations within Unidroit regarding the invalidity of no-assignment clauses gave rise


B. Headings

Various headings are used for assignment clauses. In the clauses thatwere analyzed, the following headings were found:

Assignment, Assignments, Successors and Assigns, Assignability,cession du contrat, Successors, Novation and Assignment, Assignment and Sub-Contracting

C. Distinction Between Transfer of Contract and Assignment of Rights

Many clauses do not expressly distinguish between assignment of rightsand transfer of contracts and treat both alike. For instance:

• "Neither Company nor Contractor shall be entitled to assign inwhole or in part any of its rights and obligations ..."

• "Les droits et obligations resultant du present contrat sont incessibles ades tiers sans l'accord expres de chacune des deux partiescontractantes."

In some contracts governed by English law, assignment clauses dealtonly with the assignment of rights under the contract and not with thetransfer of the contract:

"Subject to Clauses 6.7.2.2 and 6.7.2.3, this Deed is personal to theparties to it. Accordingly, no Buyer may, without the prior writtenconsent of the other, assign the benefit of all or any other party'sobligations under this Deed, nor any benefit arising under or outof this Deed."

In some instances, the assignment clause expressly refers to the transfer of the contract:

• "This Contract is not assignable by either party without the priorwritten consent of the other party, ..."

• "Otherwise, Contract shall not be assigned in whole or in part byeither party without the consent of the other."

However, these clauses remain obscure as to the question whether theyalso cover assignment of rights. Thus, contract draftsmen may be advisedclearly to indicate whether or not the assignment clause covers both theassignment of rights and the transfer of the contract.

to controversy, the Factoring Convention contains a compromise since contracting Statesmay make a reservation against article 6. France and Latvia have used this reservation inorder not to be bound by the ineffectiveness of no-assignment clauses.


In one sample clause, a distinction was made between the assignmentof money rights and the assignment of other rights:

"Neither this Agreement nor any right (other than the right toreceive the payment of money) or obligation hereunder may beassigned in whole or in part by any party without the prior writtenconsent of the other parties."

Finally, assignment clauses sometimes but not frequently identifY rightsthat are subject to special assignment requirements. For instance:

"... Buyer's right to deliveries hereunder shall not, without Seller'swritten consent, be transferable to any assignee or successor ofBuyer ..."

The above-cited examples may create the impression that contractdraftsmen, in most cases, consider carefully whether and to what extentassignments should relate to rights only or to the transfer of the contractas a whole. However, many assignment clauses tend to create the oppositeimpression, i.e., that contract draftsmen did not pay much attention to thisissue and try to cover many assignment situations in broad terms. Becauseof the different legal rules applicable to assignment of rights and transferof contracts, one should state clearly whether the assignment clause isapplicable to both situations. One might perhaps also differentiate betweenthese two cases.

D. The Location of Assignment Clauses in the Contract

Assignment clauses do not have a fixed place in the contract but aregenerally to be found more towards the end of the contract among theboilerplate provisions and after the more commercial contractual provisions. Often, assignment clauses are clearly identifiable contract clausesthat deal only with assignment. Sometimes, assignment clauses are alsofound in a contract article headed Miscellaneous, Miscellaneous Provisions orsomething similar.

E. Relationship of the Assignment Clause to Related Mechanisms

Assignment clauses can often be found in international commercialcontracts that deal only with assignment. Less frequent are assignmentclauses that not only deal with assignment but also with sub-contracting,substitution, novation19 or delegation. The following examples illustrate:

19 Assignment and novation clauses exist frequently in the context of pre-incorporation obligations of companies that are in the process of being incorporated. The novation and assignment clause is then intended-to the extent that is required by the lawapplicable-to have an incorporating company transfer the obligations to the newlyformed company.


• "Neither this Agreement nor any right or obligation hereundermay be assigned or delegated in whole or in part by any party without the prior written consent of the other parties."

• "X se reserve Ie droit, ce qui est accepte par Y, de se substituertoute societe du groupe X dans l'execution du present contrat. Yse reserve Ie droit, ce qui est accepte par X, de se substituer toutesociete de son propre groupe."

It should not surprise us that these various techniques may be regulatedin the same contract clause, since they all give effect to the personal relationship between the contracting parties (intuitu personae) that arise becausethe contracting parties have contracted with one another on the basis oftheir respective qualities. Consequently, they may want to control anyeventual assignment, sub-contracting, substitution, novation or delegation of thecontract and do so in one contract clause in order to treat these issues alike.However, the same rationale for these clauses does not necessarily imply thatall these mechanisms should be given equal treatment. One might well wantto differentiate between these various techniques.

F. Unilateral and Bilateral Assignment Clauses

In many cases, assignment clauses are bilateral. This means that theassignment clause may be applied to both contracting parties wheneverthey would like to transfer the contract or assign its rights. For example,

"Each of the Parties may at any time assign all or part of its saidinterest ... if and only if ... the remaining, non-assigning Partiesshall have consented to such assignment in writing (which consentmay only be withheld on the grounds of ..."

Bilateral assignment clauses may be symmetrical or asymmetrical. Theexample cited above is symmetrical since the assignment clause treats bothparties alike. In asymmetrical clauses, a distinction is made between theposition of the parties. The different treatment of the parties is often to beexplained by their respective bargaining power. An example of an asymmetrical clause:

"This License Agreement is not assignable by Licensee without theprior written consent of Licensor. It shall be assignable by Licensorwithout Licensee's prior consent provided the assignee receives allrights and properties possessed at the date hereof by Licensorwhich are pertinent to this License Agreement, and agrees to bebound in all respects in place of Licensor."

However, unilateral assignment clauses also exist where the assignmentclause only envisages the position of one of the contracting parties. This


may be related to the specific nature of the contract, as for instance in thefollowing case relating to an aircraft financing where the assignment clauseonly refers to the buyer's option to assign the contract or his rights underthe sale contract:

"... this Agreement shall be assignable by Buyer in whole or inpart to a wholly-owned subsidiary or affiliate of Buyer or any financial institution which is providing financing to Buyer in connectionwith Buyer's acquisition of the Aircraft ..."

Unilateral assignment clauses may also give an indication as to the parties' bargaining position in negotiating the contract (for an example, seeSection H.I).

G. Compulsory and Voluntary Assignment

In some legal systems, assignments do not only take place by agreement between the assignor and the assignee (voluntary assignments) butby law that imposes assignment20 or provides for the possibility that a judgemay order assignment. 21 Generally, assignment clauses do not distinguishbetween voluntary and compulsory assignments, which raises the questionwhether both situations must be deemed encompassed in the clause. Tothe extent that mandatory rules are involved, the issue is much less relevantbecause contractual restrictions on assignment, which run counter tomandatory rules, will generally be ineffective. In any event, the safest courseis to draft the assignment clause in a broad way drawing the distinctionbetween voluntary and compulsory assignments. In a limited number ofclauses, such a distinction has been made:

• "Any provision herein to the contrary notwithstanding, thisAgreement shall inure to the benefit of, and be binding upon theparties hereto and their respective successors and assigns, but itshall not be voluntarily assigned in whole or in part by either partywithout the prior written consent of the other party provided ..."

• "This Agreement is a personal one, being entered upon and inconsideration of the singular personal skill and qualification of theConsultant. The Consultant shall therefore not voluntarily or byoperation of law assign or otherwise transfer the obligations

20 E.g., transfer of employment contracts in the European Union by virtue ofDirective 77/187 of February 14,1977 (OJ L. 61, March 5,1977,26-28, now Directive2001/23/EC of March 12,2001) on the approximation of the laws of the member Statesrelating to the safeguarding of employees' rights in the event of transfers of firms, businesses or parts of businesses.

21 E.g., under French law, ajudge may order the transfer of contracts in the case ofinsolvency proceedings.


incurred on its part pursuant to the terms of this Agreement without the prior written consent of the Company."

• "This Agreement and the rights, benefits, obligations and remedieshereunder or any interest therein shall not be assignable or transferable by operation of law or otherwise by any party without theprior written consent of the other parties."

H. Various Clauses Regulating Assignments

This section of the chapter will discuss the various clauses in which thecontracting parties have regulated assignments. In this respect, someclauses give one party a right to assign (Section IV.H.I), other clauses contain an absolute ban on assignment (Section IV.H.2). Most clauses restrictassignments but make them not impossible (Section IV.H.3). Finally,clauses often provide for exceptions to these restrictions (Section IV.H.4).

1. Right to Assign 22

Contracting parties, with strong bargaining power, sometimes succeed inimposing upon the other contracting party an assignment clause that givesthem an unconditional right to transfer the contract or assign its rights, forinstance to affiliated or other identified companies. For example:

"Owner at his sole discretion and by simple notice of assignmentto Contractor shall have the right to freely assign, charge, transferor declare any trust over the Contract or any part thereof or anyright, benefit or interest arising thereunder to any shareholders ofthe Owner or any of its affiliates."

2. No-Assignment Clauses

Sometimes, assignment clauses contain an outright and absolute prohibition to transfer the contract or assign its rights. For instance:

"Contractor shall not assign the Contract, nor transfer any part ofit, nor any benefit, interest, right or obligation therein nor payment due thereunder."

The absolute prohibition to assign may be general or might be limitedto certain territories or to certain persons. 23 Absolute bans on assignmentor transfer may be troublesome in practice if one party insists on assignment or transfer while the other party invokes the absolute ban. The solution will then have to be found in the termination of the contract accordingto its provisions and the conclusion of a new contract with the potential

22 See also J.M. Mousseron, op. cit., p. 230 (les clauses de tolerance).

23 J.M. Mousseron, op. cit., pp. 226-227.


assignee. Since this may be an unattractive option, the absolute ban mightbe challenged and tested in court. No-assignment clauses are thus inflexible and may give rise to litigation. Less absolute restrictions are probablypreferable.

3. Restrictive Assignment Clauses

In many cases, assignment clauses do not prohibit assignment absolutely but specific conditions under which assignment is possible. Theseclauses restrict rather than prohibit assignment and may be called restrictiveassignment clauses. They have the advantage of being much more flexiblethan no-assignment clauses. The restrictions relate primarily to the consentto be sought by the assignor from the debtor/obligor and operate as a conditional anticipatory consent to assignment. For instance:

"Each of the Parties may at any time assign all or part of its saidinterest ... if and only if ... the remaining, non-assigning Partiesshall have consented to such assignment in writing (which consentmay only be withheld on the grounds of lack of financial responsibility and capability of the proposed assignee to discharge theobligations under this Agreement as they relate to the interests tobe assigned)."

As one may see from the just cited example, the conditions imposedmay deal with various issues regarding the assignment. The following issueshave been identified:

1. the time at which assignment is possible;242. the procedures to be followed in order to obtain consent;3. the formal requirements for giving such consent;4. the criteria for refusal to consent to assignment;5. the consequences of not giving consent within a certain period;6. the remedies for the party seeking consent to challenge a refusal

to consent to the assignment; and7. the sanctions in case of non-compliance with the restrictions con

tained in the assignment clause.

Some of these elements will be discussed hereafter. 25

21 Most clauses do not deal with this issue. In one case, the stipulation was thatassignment was possible at any time: "Each of the Parties may at any time assign if theremaining, non-assigning Parties shall have consented ..."

25 Not all issues can be discussed within the context of this report. For instance, oneclause provided that consent to assignment granted by either party shall not be deemeda waiver in any subsequent case triggering the assignment prohibition of an assignmentclause. Regarding non-waiver clauses, see Chapter 3, p. 163ff.


a. Procedure to Obtain Consent

Also, assignment clauses hardly deal with the procedures to be followedfor getting the debtor's/obligor's consent. 2G In one rare exception, see thefollowing clause:

"Where either Partner (in this clause called 'A') wishes to assign itsrights it shall notifY the other (in this clause called 'B') and as soonas practicable furnish to B such information about the proposedassignee as may be available and reasonably requested by B.

B shall decide whether or not to consent to such assignment or terminate the partnership as terminating partner under Clause 12below. B shall notifY such decision to A in writing as soon as practicable and in any event not later than twenty days after notice shallhave been given under Clause 11.1)."

b. Formal Requirements

Often but not always, restrictive assignment clauses provide for the formal requirements of any consent to be given and mostly make the compliance with such requirements a condition precedent of the assignment ofthe contract:

"No such assignment shall be effective or binding upon the Partiesuntil the date upon which the assignor or assignee furnishes all theParties with ... a written instrument in form and content satisfactory to the Parties and duly executed by the assignee ..."

c. Criteria for Refusing Consent

Various criteria are used on which a refusal to consent to the assignment may be based. The various criteria may be determined by differentfactors including the bargaining power of the contracting parties.

At one extreme, one finds clauses that require consent without specifying the standards according to which consent or refusal is to be given:

"... without the prior written consent thereto of the other party."

It is unclear whether these clauses express a discretionary power on thepart of the debtor/obligor to give or refuse his consent, or whether theseclauses are to be interpreted that the parties did not settle the issue and

26 There are, however, some exceptions to this rule. In some contracts such as sharetransfer agreements and joint-venture contracts, these procedures generally do receivesufficient attention.


that, therefore, there is further scope for common principles of contractlaw to determine whether consent is to be given or ought to have beengiven. In order to avoid these complications, contracting parties sometimesclearly express the discretionary nature of the consent of the debtor/obligor as in this case:

• "B shall having regard to the financial standing and business experience of the assignee and the likely effect on the partnership andits business of the assignment, in its absolute discretion decidewhether or not to consent to such assignment ..."

• "Supplier may not assign or transfer any of its rights, benefits orobligations under this Agreement without the prior consent of Xgiven in writing in each case (which consent X may refuse at itsdiscretion) ."

While the second example is clearly discretionary, the first one is not.In that case, both a discretionary criterion and some objective parametersare used that may be contradictory and give rise to interpretation problemsand litigation.

In other cases, the parties expressly refuse to give discretion to one ofthem in deciding whether or not to consent to assignment. Then, the contracting parties in their assignment clause expressly attempt to stipulatemore objective standards regarding one party's consent to assignment. Inrelation to these clauses, one basically finds two categories. On the onehand, some clauses provide for an open-ended formula stating that consentshould not unreasonably be withheld:

• "Neither this Agreement nor any of the rights of the Buyer hereunder shall be assignable by Buyer in whole or in part withoutSeller's written consent which shall not be unreasonably withheld."

• "La banque se reserve Ie droit de transferer, en tout ou en partie,a d'autres banques tous les droits et obligations resultant de lapresente convention. Un tel transfert ne pouna avoir lieu qu'avecl'accord ecrit de la creditee, qui ne sera pas refuse sans raison."

These clauses tend to express the idea that assignment may only berefused for cause, which may imply that refusal should also be motivatedand is subject to review by courts or arbitrators on the basis of notions ofreasonableness or good faith. This approach offers flexibility but, on theother hand, increases risks of disputes over the question whether therefusal to consent to assignment was proper, which may lead to court intervention (including provisional measures) and review. Thus, some clausesmake attempts to replace an open-ended approach by stricter criteria.Financial responsibility and capability have already been mentioned (see


Section N.H.3) as an example of such an objective and more specific standard. More examples have been found in assignment clauses:

"... which consent shall not be withheld where the assigning Participant satisfies the other Participants that the proposed assigneehas the financial and technical status and ability to observe and perform in a proper and timely manner the obligations to be assigned(it being understood that such consent may reasonably be withheldin the case of a proposed assignment to a competitor company)."

d. No Reaction Upon the Request for Consent

Few are the clauses that deal with the situation of the debtor/obligornot reacting to a request to consent to assignment. Only one of the clausesanalyzed provided a solution to this problem by stipulating that thedebtor's/obligor's failure to react is deemed to constitute consent:

"... In the absence of such notification B shall be deemed to haveconsented to such assignment."

e. Consent Refused

Assignment clauses generally do not provide anything further for thesituation arising from consent being timely and properly refused by thedebtor/obligor. This may be explained psychologically. The parties do notgenerally want to state that the assignor then may seek remedies in a courthavingjurisdiction. Moreover, the dispute settlement clause in the contractmay well already provide the techniques for settling disputes in generalincluding disputes arising out of a refusal to consent.

f. Sanction Upon Non-Compliance

Assignment clauses only rarely provide sanctions in case of non-observance of the requirements set forth in the assignment clause. The following are examples of the few cases which deal with this problem:

• "... and any attempted assignment without such prior written consent shall be void ab initio."

• "Any attempted assignment of rights or delegation of duties not inconformity herewith shall be void and of no force or effect."

In one specific case, where a special assignment provision was draftedin order to restrict the assignability of deliveries of commodities sold, a draconian sanction was also provided in the contract:

"... and in the event of any such attempted transfer, Seller, in addition to other legal rights and remedies, may cancel this Agreement


as to the unshipped portion of the Product covered by theAgreelnent."

Finally, in an exclusive distributorship contract, the following sanctionwas provided in the event the distributor were to assign the contract without the prior written consent of the manufacturer:

"Any assignment of this Agreement in contravention of this clauseshall be null and void and constitute a default hereunder."

The sanction provisions in assignment clauses operate between thecontracting parties. However, in many cases, the assignee will have seen thecontract and have been or will be deemed informed about the requirementof the debtor's/obligor's consent. Therefore, the assignee may eventuallyalso be liable for non-compliance under the conditions of the assignmentclause, for instance on the basis of tortuous interference with the contract.These clauses, however, have foremost a deterrent function and may forceboth assignor and assignee to seek the debtor's/obligor's consent prior toeffectuating the transfer.

4. Exceptions to No-Assignment or Restrictive Assignment Clauses

Prohibitions to assignment and restrictions on assignment are oftensubject to exceptions. A frequent exception to a no-assignment clause ininternational contracts is the affiliat~exception.Sometimes, other exceptions may be found and will be discussed hereafter.

a. The Affiliate Exception

Many assignment clauses expressly provide for the possibility of assigning the contract or the rights under a contract to an affiliate company. Inthat case, contracting parties may assign their rights under the contract orthe contract itself by virtue of the affiliate-exception-notwithstanding theassignment clause-to a company being part of the same corporate group.This rather widespread exception is inspired by business reasons andstresses the importance of groups of companies in international businesslife. Companies generally in contracting want to reserve the possibility forgroup re-structurings (for instance for financial, tax or strategic reasons)and provide in their contracts that these are not to be assigned save to affiliate companies.

In some cases, the affiliate-exception is unconditional. In other cases,further requirements must be met:

• "Each of the Parties may, subject to ... the provisions hereinaftercontained, at any time upon notice to the other Parties assign all


or part of its said interest to an Mfiliate of such Party which hasdemonstrated to the satisfaction of the other Parties its financialcapability to meet its prospective obligations hereunder."

• "The Buyer may not without further consent assign the benefitand/or burden of this agreement provided that the Buyer may soassign to any of its Group Companies if it gives to the Seller aunconditional continuing guarantee of its obligations under theAgreement and any other agreements entered into hereunder interms which are reasonably satisfactory to the Seller."

Sometimes, the consent of third parties (e.g., the banks involved infinancing the transaction) is required:

"The Buyer shall have the right at any time to sell, transfer orassign all the rights and/or the obligations that it has or mayacquire under this contract to another corporation wherein it orMr. X or Y is the main party, with the agreement of the government of Z and European financial authorities."

These affiliate-clauses raise the issue as to the effects on the contract ifthe subsidiary in any way (e.g., share sale, demerger) quits the corporategroup. Many affiliate-clauses do not examine this issue. One clause didforesee this problem and made the assignment conditional on the affiliateremaining within the group:

"Neither this Agreement nor any of the rights, interests, or obligations under this Agreement may be assigned by any party withoutthe prior written consent of ... , except that each party may assign,in its sole discretion, but without being released from its obligations hereunder, any or all of its rights or interests or performanceof its obligations under this Agreement (other than those arisingunder Section 8) to any direct or indirect wholly owned subsidiaryof such party and only as long as it remains a subsidiary."

The preceding clause does not characterize the condition made to theassignment nor does it provide what is to happen in case the subsidiary ceasesto belong to the corporate group. The solution may be found in another casewhere re-assignment by the affiliate to the original assignor was provided forin case the affiliate were to leave the group of the original assignor:

"Each Participant shall be entitled to assign any or all of its rightsand obligations under this Agreement to an Mfiliate of thatParticipant without the consent of the other Participants, providedthat in such event the proposed assignee shall enter into an agreement with such other Participants to be bound by this Agreement,


and such agreement shall include a legally enforceable covenantby the proposed assignee that it shall reassign this Agreement tothe assigning Participant or to another Mfiliate within the originalassigning Participant's Group prior to ceasing to be an Mfiliatewithin the assigning Participant's Group."

These clauses raise the problem of finding a proper definition of theterm "affiliate." In view of differences in definitions in various countries,the contracting parties should consider defining the concept of affiliate.The necessity of finding an acceptable definition is confirmed by international contract practice where one sees many contracts in which eithersummary or extensive definitions of affiliate are given and which may, attimes, appear in the definitional provision of the contract. 27

b. Other Exceptions

Apart from the affiliate-exception, other exceptions have been found,for instance, relating to mergers and acquisitions:

27 The subject of the various definitions of affiliates falls outside the scope of thischapter. However, for information purposes, some definitions may hereafter be given asexamples. For an extensive definition, see the following:

"Affiliate shall have the meaning in relation to any Party, any company

(a) in which a Party hereto owns directly or indirectly share capital conferring at least fifty percent (50%) of votes at stockholders' meetings; or

(b) which is the owner directly or indirectly of share capital conferring atleast fifty percent (50%) of votes at stockholders' meetings ofa Party; or

(c) whose share capital conferring at least fifty percent (50%) of votes atstockholders' meetings of such company and the share capital conferringat least fifty percent (50%) at stockholders' meetings of a Party are owneddirectly or indirectly by the same company."

Shorter definitions are more frequent:

'''Mfiliate' means a subsidiary company in which Owner owns fifty percent(50%) or more of the voting shares, or a parent company which ownsdirectly or indirectly fifty percent (50%) or more of the voting shares of theOwner~ or a subsidiary part of a parent as defined."

Finally, some clauses define the concept of affiliate by reference:

"... which shall be a subsidiary of X as defined by section 736 of the (UK)Companies Act 1985 (as amended)."

or

"However, this Agreement and the rights and obligations which arisehereunder can be freely transferred to those companies considered tobe affiliated to a party to this Agreement under the rules of the Belgianaccounting legislation."


• "This Contract is not assignable by either party without the priorwritten consent of the other party hereto, except that it may beassigned without such consent to the successors of either party orto a person, firm or corporation acquiring all or substantially all ofthe business and assets of such party."

• "This Agreement shall inure to the benefit of and be binding uponeach of the parties hereto and shall be assignable to the successorto the entire business of either party relating to the subject matterof this Agreement."

• "Notwithstanding the preceding however, each party shall have theright to assign its rights hereunder without the other party's consent, to a successor to more than one half of its assets, or to amajority owned subsidiary or a majority owner of the assignor."

• "This Agreement may be assigned by B to one of its affiliated companies, but it shall not be otherwise assigned, transferred or sold,by any party without the prior written consent of the other exceptto an assignee of substantially the entire business assets of theassigning party hereto ..."

Other clauses that mitigate the restrictions on assignment are insertedin contracts for commercial reasons:

• "At Seller's option, and without any requirement for Buyer's priorconsent, Seller may assign this Agreement, including all its rights andobligations hereunder, to another party designated by Seller whoshall have succeeded to Seller's right to sell the product producedfrom the reserves described in paragraph 2 of this Sales Agreement."

• "This Agreement and the benefit of the rights granted to theDistributor by this Agreement shall be personal to the Distributorwho shall not without the prior consent of the Principal mortgageor charge the same to any third party nor subcontract nor assignthe same nor part with any of its rights or obligations hereundersave that the foregoing shall not prevent the Distributor from factoring or mortgage or in any way creating a charge or security overProducts the title in which shall have passed to it or over bookdebts created by the sale of such Products."28

Finally, financing concerns may inspire contracting parties to provideexceptions to restricted assignment in favor of financial institutions:

• "... this Agreement shall be assignable by Buyer in whole or inpart to a wholly-owned subsidiary or affiliate of Buyer or any financial

28 Clause cited by R. Christou, Drafting Cornrnercial Agreernents, 2nd edition, London,Sweet & Maxwell, 1998, p. 316.


institution which is providing financing to Buyer in connectionwith Buyer's acquisition of the Aircraft ..."

• "... provided, however, that C may pledge all or part of its interestin this contract to a bank or a financial institution in the ordinarycourse of its business and may assign all of its right, title and interest in and to this agreement to any party in the event that A is indefault beyond any period provided for cure of such default of anyof its obligations to C under this agreement without A's prior written consent."

The mere fact that assignment clauses provide for exceptions, as discussed above, does not necessarily imply that assignment is unconditional.However, the analysis of assignment clauses has revealed that clauses providing for exceptions to assignment prohibitions or restrictions tend tofocus primarily on the definition of these exceptions and not so much onany requirements to be met in case of such an assignment. In this respect,the following clauses are rather unusual:

• "This Agreement ... shall not be otherwise assigned, transferredor sold, by any party without the prior written consent of the otherexcept to an assignee of substantially the entire business assets ofthe assigning party hereto and only if such assignee in writingagrees to assume such assigning party's obligations hereunder andto be bound by the terms and conditions hereof."

• "... , this Agreement ... shall not be voluntarily assigned in wholeor in part by either party without the prior written consent of theother party, provided, however, that no such prior consent shallbe required for any assignment of this Agreement in its entiretyby either party to a successor in interest of such party as a resultof any merger or consolidation involving such party, or of a saleby such party of the entire business relating to the subject matterhereof, provided that said successor in interest or successor's parent company is not already manufacturing Licensed Products inJapan or is not manufacturing Licensed Products under a licensefrom any third party manufacturing Licensed Products in Japan,and provided further that it agrees to undertake all the obligations of the assignor."

I. Partial Assignments

Assignment clauses do not always distinguish between complete andpartial assignments. In some cases, however, partial assignments have beenconsidered:

• "No assignment or transfer of any interest under the Licence orthis Agreement shall be made by any Party otherwise than in


respect of an undivided interest in all or part of its interest in theLicence and in and under this Agreement ..."

• "Neither Company nor Contractor shall be entitled to assign eitherin whole or in part any of its rights and obligations under theContract without ..."

J. Consequences of the Application of the Assignment Clause

Some, but far from all, assignment clauses pay attention to the effects ofthe assignment. To the extent they do, a distinction may be made betweenthe effects of the assignment clause vis-a-vis the assignee, the assignor and thedebtor/obligor.

1. Consequences Vis-a.-Vis the Assignee

Since the consent of the debtor/obligor is often required for the assignment of contracts, the debtor/obligor may make his consent expressly conditional upon the assignee becoming liable under the contract in the sameway as the assignor was. In this respect, many clauses are inspired by the following boilerplate clause:

"The provisions of this Agreement shall enure for the benefit ofand be binding on the successors in title and permitted assigneesof the Parties."

Other language expresses the same idea:

"When duly assigned in accordance with the foregoing, this Contract shall be binding upon and all rights and obligations hereunder shall be assumed by the assignee."

Often, this effect will already be produced by virtue of the law applicable to the assignment. In this respect, assignment clauses not only repeatthe extent of the assignee's obligations under the applicable law but mayfunction primarily to extend these obligations, for instance, regardingobligations existing at the time of the assignment (pre-assignment obligations). Any such extension requires the consent of the assignee. Thus,assignment clauses sometimes provide expressly for a mechanism in orderto guarantee to the debtor/obligor that the assignee is bound by the contract. Thus, the following unilateral clause:

"Any party to whom the rights and obligations under the Contractare transferred shall be bound by all the provisions of the Contract. Contractor shall procure as a condition precedent to anyassignment that such assignment shall


a. be executed in accordance with the provisions of the Contract,

b. be executed contemporaneously with a separate specific agreement in favour and for the benefit of Company to the effect thatthe assignee accepts and agrees to be bound by the Contract, and

c. be of no force or effect whatsoever unless and until the provisions of this article have been met, and an executed copy of theagreement referred to in b. above has been delivered to Companyas a precondition to granting the required written consent."

or the following bilateral clauses:

• "No assignment of this Contract shall be valid until and unless thisContract shall have been assumed in writing by the assignee."

• "... the assigning Participant shall provide to such other Participants a direct covenant by the proposed assignee (in favour ofand in a form satisfactory to each other Participant) that, witheffect from the effective date of the assignment, the proposedassignee shall observe and perform all the terms of this Agreement, as assigned to it; and such assignee shall be entitled to all ofthe rights and subject to all of the obligations of the assigningParticipant to the extent so assigned, ..."

Non-compliance with the conditions and procedures contained in theseclauses may trigger the liability of the assignor. Less clear are the effects ofany such violation on the assignee. In practice, however, the assignee willoften have seen the contract including its restrictive assignment clause, andhis liability may as well be invoked. Therefore, the safest way for both assignorand assignee is to comply with the provisions of the assignment clause. Onemight thus say that these clauses provide for the machinery to make theassignee accede to the existing contractual relationship.

2. Consequences Vis-a-Vis the Assignor

Less frequent are assignment clauses that regulate the effects of theassignment upon the assignor. The question is whether assignment clausesprovide anything regarding the effects of the transfer of the contract on theobligations of the assignor under the contract. Is the assignor discharged,and from what moment on, or does the assignor remain liable with theassignee, either severally or jointly?

Since the obligor's consent is required to transfer the contract, theobligor may state his conditions before agreeing to the transfer. Assignmentclauses, in this respect, are anticipatory clauses that determine the effectsof the transfer of the contract upon the assignor if a transfer were to occur.


Considering the bargaining power of the contracting parties and thenature of the contract, a variety of contract clauses has been found. At oneextreme of the spectrum, assignment clauses regarding the transfer of thecontract (as opposed to the mere assignment of the rights) provide for ormay be interpreted as joint liability for both assignor and assignee towardsthe debtor/obligor:

• "... provided the Buyer shall remain jointly and severally liablewith the assignee for the fulfilment of all the terms and conditionsof this Agreement."

• "... provided, further, that the assigning party shall remain jointlyand severally liable for the performance of the obligations hereunder that are so assigned."

• "Any assignment of this Agreement by either party shall not relievethe assigning party of its duties or obligations hereunder."

or (in case of an assignment made in order to vest a security interest):

"Any such assignment by way of security shall not relieve or in anyway discharge Group from the performance of its duties and obligations under this Agreement."

In the preceding clauses, some do provide for joint and severalliability where others do not determine the respective positions of the assignorand the assignee vis-it-vis the debtor/obligor. In one other clause, the issuewas raised but-subject to further interpretation-remained unresolved asto the order in which to take recourse:

"Notwithstanding any assignment of this Agreement, the assigningparty shall remain primarily liable for all its obligations hereunderwithout any recourse being required to any such permitted assignee."

Sometimes a distinction is made regarding the moment the obligationwas incurred. Pre-assignment obligations are then treated differently frompost-assignment obligations as in this example:

"A Party so assigning all or part of its said interest shall remainliable to the other Parties for all obligations attaching to the interests assigned pursuant to this Clause 21 which are incurred priorto the effective date of such assignment and such obligations shallin addition become the obligations of the assignee."

At the other end of the spectrum, some clauses provide for the assignor'sdischarge:

• "The Mfiliate will thereafter be liable solely for the performanceof Owner's obligations hereunder."


• "This License Agreement shall be assignable by Licensor withoutLicensee's prior consent provided the assignee receives all rightsand properties possessed at the date hereof by Licensor which arepertinent to this License Agreement, and agrees to be bound in allrespects in place of Licensor."

• "On the transfer being made, the original Bank shall be relievedof its obligations to the extent of the transfer of such obligation,the transferee shall become a Bank to the extent of the rights andobligations so transferred, for all purposes of this Agreement, andAnnex I of this Agreement shall be amended accordingly."

3. Consequences Vis-a- Vis the Debtor/Obligor

Another issue concerns the position of the debtor/obligor upon assignment. In this respect, assignors, with strong bargaining positions, imposeupon the debtor/obligor that he will remain liable under the contract:

"Assignment of the Contract by Owner shall not relieve Contractorof any of his obligations or liabilities and Contractor hereby agreesto continue to perform all his duties and obligations under theContract in the event of such assignment."

One may question whether these clauses are necessary, since, undermany national laws, the transfer of the contract does not change the position of the debtor/obligor. The contract, as such, is being transferred andone party is substituted for another. However, one might argue that theclause cited above may be relevant if the assignee and the debtor/obligorre-negotiate the contract upon transfer. The clause may then be an argument in the re-negotiating process.

K. Warranties of the Assignor Vis-a-Vis the Debtor/Obligor and Indemnities

Generally, assignment clauses seldom provide for warranties to begiven by the assignor to the debtor/obligor nor for indemnities to be paidin case of breach. There are two exceptions:

• "Si l'etablissement exploite par Ie client est transfere pour une raison quelconque aun tiers, soit a titre de propriete, soit a titre degerance, Ie client signataire du present contrat repond de ce queles obligations en resultant soient transferees ason successeur."Si cette obligation de transfert n'est pas respectee, il repond aussipour les actes de ses successeurs."

• "Purchaser shall indemnify X, Seller and their Mfiliates against,and hold each of them harmless from, any loss, claim, damage, liability or expense arising out of or relating to the assignment byPurchaser to a third party other than an Mfiliate of Purchaser, of


all or any portion of its rights and obligations pursuant to thisAgreement including, without limitation any increased liability forTaxes or Transfer Taxes."The indemnities provided for above shall be in addition to any liability that the respective parties may otherwise have under thisAgreement and shall not be subject to the limitations provided inSections 7.1,7.2 and 7.3 hereof."

L. Costs Related to Assignment

Parties seldom provide for anything regarding the costs associated withthe assignment. In one contract, however, the following clause was founddealing with this problem:

"All costs and expenses pertaining to any such assignment, including any stamp duty, shall be the responsibility of the assignor."

V. CONCLUSIONS

Assignment of rights and transfer of contracts are important to international business life. For contracts concluded intuitu personae, contractingparties use their autonomy to adapt their contracts to the features of theirrelationships. In this respect, assignment of rights but-more importantly-transfer of contracts have led to more or less extensive assignmentclauses. In this respect, one may note a certain degree of standardizationof assignment clauses due to the widespread use of boilerplate clauses.

For practitioners, the following suggestions may be helpful:

1. A clear distinction between assignment of rights and transfer ofcontract is to be recommended. Since both situations are regulated by different rules, one should distinguish in the assignmentclause between them regarding their requirements, proceduresand effects;

2. One might also want to distinguish between assignment of rightsand transfer of contracts, on the one hand, and related mechanismssuch as delegation, subrogation, novation and sub-contracting, onthe other. Although many of these mechanisms are inspired by thesame concern of preserving control over the intuitu personae character of the contract and thus, over the identity of the counter-party,the requirements, procedures and effects of these various mechanisms may differ. It might be advisable to identify more clearly incontract clauses these various hypotheticals;

3. In order to give assignment clauses a broad scope of application,one may suggest not only to bring voluntary assignments within


the scope of the assignment clause but also-to the extent permitted by the applicable law-compulsory assignments;

4. It is generally, for business and legal reasons, recommended tolimit in time no-assignment clauses regarding transfers of contracts. As an alternative, restrictive assignment clauses could beconsidered;

5. Restrictive assignment clauses tend primarily to restrict and control transfers of contracts and provide procedures, conditions andstandards under which contracts may be assigned. One should paysufficient attention to the following issues: (1) what happens if theobligor does not respond to the assignor's request for consent?(see Section IV.H.3.d); (2) what happens if the obligor refuses consent? (see Section IV.H.3.e); and (3) what are the sanctions if theassignor does not comply with the provisions of the assignmentclause? (see Section IV.H.3.f);

6. In restrictive assignment clauses, one should look closely to the criteria upon which the obligor may base a refusal to consent to atransfer of the contract. Discretionary criteria may seem to protectthe obligor's interests but may still lead to challenges in court.Open-ended criteria (e.g., "shall not unreasonably be withheld")may prove flexible but are less certain. Objective parameters arerather rigid but provide for more stability;

7. Many assignment clauses provide for the possibility to assign therights under the contract or to transfer the contract itself to affiliate companies. These clauses require a good definition of theaffiliate concept. In this respect, one should also consider thehypothetical that an affiliate may cease to be part of a corporategroup and consider whether this case should be covered by a special contract provision;

8. Assignment clauses may also consider the effects of mergers,demergers and acquisitions on the rights and contracts of a company and whether it is useful to provide an exception to restrictiveassignment clauses for these cases;

9. Finally, the effects of assignment generally do not receive sufficientattention. Therefore, it is suggested that assignment clauses shouldconsider whether specific provisions are to be included that outline the effects of the assignment on the assignee, the assignor andthe obligor.

These suggestions certainly open perspectives for increased sophisticationof assignment clauses in international commercial contracts.

CHAPTER 12

TERMINATION CLAUSES

I. WORK METHOD

True to its objectives, the Working Group looked at termination andsynonymous clauses in international commercial contracts from the perspective of international contract draftsmen. On the basis of discussionsand analyses of sample clauses provided by its members working in legal orcontract departments of companies or working in private practice,! general

1 The following termination clauses contained in international instruments shouldalso be mentioned:

Articles 18 and 20 of the ICC Model Commercial Agency Contract, ICCPublication No. 644, Paris, ICC Publishing, 2002;

Articles 19 and 20 of the ICC Model Distributorship Contract, ICCPublication No. 646, Paris, ICC Publishing, 2002;

Chapter XXV-Termination of Contract of the Legal Guide on DrawingUp International Contracts for the Construction of Industrial Works,UNCITRAL, U.N. Sales No. E.87.Y.10, Doc. A/CN.9/SER.B/2, 1988;

Article 2.2.9-Postponement and Termination of the International ModelForm of Agreement between Client and Consulting Engineer andInternational General Rules of Agreement between Client and ConsultingEngineer for Pre-Investment Studies (IGRA 1979 P.I.), FIDIC, 3rd ed.,1979; Article 2.2.9-Postponement and Termination of the InternationalModel Form of Agreement between Client and Consulting Engineer andInternational General Rules of Agreement between Client and ConsultingEngineer for Project Management (IGRA 1980 PM), FIDIC, 1980; Article2.2.9-Postponement and Termination of the International Model Form ofAgreement between Client and Consulting Engineer and InternationalGeneral Rules of Agreement between Client and Consulting Engineer forDesign and Supervision of Construction of Works (IGRA 1979 D&S),FIDIC, 1979, all replaced by the Client/Consultant Model Services Agreement-The White Book, FIDIC, Lausanne, 2nd ed., 1991;

Conditions of Contract for Electrical and Mechanical Works-The YellowBook, FIDIC, Lausanne, 1st ed., 1963 (clauses 41-47), 2nd ed., 1980(clauses 44-48 and 51), 3rd eel., 1988 (clauses 33 and 44-46) ;

Conditions of Contract for Works of Civil Engineering Construction-TheRed Book, FIDIC, Lausanne, 2nd ed., 1969 (clauses 63, 65-66, 69), 3rd ed.,1977 (clauses 63, 65-66 and 69), 4th ed., 1989 (clauses 63,65 and 69); (In1999, new FIDIC conditions were published. The old conditions are citedin this chapter by way of example only to the extent that they express original solutions).

Conditions Generales AFB pour les operations d'echange de devises et/oude conditions d'interers, Association fran<;:aise des Banques, March 1987;

565


trends and problems regarding these clauses were observed. This chapterattempts to provide a summary of the discussions and analyses. This istherefore an analytical description, which has the advantage of givingextensive attention to the various elements of these clauses. However, tounderstand termination clauses, an overall perspective is also neededincluding their various elements, other contract clauses2 and the factualbackground of the circumstances under which these clauses have been orare to be used.

Attempts to classify termination clauses (see Sections IV.E. throughN.M) may create the false impression that all termination clauses fallwithin one of these categories, but classification only facilitates a betterunderstanding of the various options available to contracting parties and isnot intended to be comprehensive.

Finally, one should note that termination clauses in international commercial contracts tend to be standardized to a certain extent, with similarcontents and wording. However, one cannot characterize terminationclauses as boilerplate clauses that are copied from one contract to anothernot only within the same company or law firm but also across the legal profession. Indeed, the degree of standardization of termination clauses is lesspervasive than for some other clauses (e.g., interpretation and assignmentclauses3). The reason for the more tailor-made nature of terminationclauses is that they are related to the core of the contract. Often, these termination clauses sanction breaches regarding fundamental contractualobligations or express circumstances under which the parties no longerwish to continue their contractual relationships. Because of their importance, termination clauses are the subject of negotiations between partiesto one-off contracts. Bargaining power and strategies also determine thecontents of the termination clause and an imbalance to which a party isforced to agree regarding one part of the termination clause is sometimesset off by modification to another part of the termination clause. Thisexplains the great variety of termination clauses one finds in internationalcommercial contracts.

Code of Standard Wording, Assumptions and Provisions for Swaps, 1986ed., International Swap Dealers Association, 1986 and International SwapDealers Association Master Agreement;

International Foreign Exchange Master Agreement.

2 See, for instance, the relationship between termination and certain assignmentclauses mentioned by Mousseron (Technique contTactuelle, Paris, Lefebvre, 2nd eel., 1999,pp. 229-230). In those particular examples, the transfer of the contract by the assignorentitled the obligor to terminate the contract in order to avoid contractual relationshipswith the assignee.

" See supra Chapters 3 and 11.

Termination Clauses • 567

II. INTRODUCTION AND DEFINITIONS

Termination of contracts is a well-known problem in international business life. As to the law on termination, many civil law countries have statutory rules on the subject.4 These rules generally deal more with terminationof the obligations stemming from the contract than with the terminationof the contract itself. Legal scholarly writings therefore had to fill this gapand provide a conceptual background for contract termination. In codifications and legal literature, one can generally find rules on the grounds fortermination as well as the requirements and the effects of termination onthe obligations and the contract itself. In common law jurisdictions thereare few statutory rules on termination, while established precedents offersolutions to demanding problems. In addition to national rules, there arealso uniform texts that contain provisions relevant to contract termination.In this respect, one may note the many uniform texts in the field of transport law and the Convention on the International Sales of Goods 1980(CISG), the latter now in force in over 60 countries. Finally, in international commercial arbitration, some persuasive authority for resolving disputes about termination has been established in the Unidroit Principles forInternational Commercial Contracts5 and in the Principles of EuropeanContract Law. 6 However, these Principles and other sources of lex mercatoria will, as such, not be able to settle termination disputes completely, and,in general, termination disputes between companies will also have to besolved by reference to national law. 7

Before discussing the scope of this chapter, here are some terminological indications. Since grounds for termination of obligations and contracts may differ among jurisdictions and no universal terminology isavailable, this chapter will use the generic terms of termination clauses andtermination of obligations and contracts. Where useful or necessary, further distinctions as to the grounds for termination will be made.

III. SCOPE OF THE CHAPTER

Because of the vast range of issues regarding termination, some restrictions were made in order to limit the scope of the project. First, the analy-

1 Differences in terminology among the various jurisdictions regarding terminationis a factor that complicates work in this area.

s Principles of International CO'fn'rnercial Contracts, Rome, Unidroit, 2004, 385 pp. Forthe most extensive commentary, see M.J. Bonell, An International Restatement of Contractloaw, The Unidroit Principles of International Commercial Contracts, 2nd ed., Irvington N.Y,Transnational, 1997.

Ii Commission On European Contract Law, The Principles ofEuropean Contract Law,O. Lando, & H. Beale, (eds.), The Hague, Kluwer Law International, 2000, 561 pp.

7 This may be different in State contract-litigation where States and public enterprises are involved.


sis dealt only with general problems of the law of contract and obligationsregarding termination. Special contracts that, under the applicable law,may be affected by special considerations or governed by specific provisions(e.g., mandatory rules on termination of commercial agents,i'l mandatoryrules on protection of employees against dismissal, protection of consumers against termination of contracts,9 provisions in insurance law relating to termination of insurance contracts, termination of contractsregarding intellectual and industrial property rights, termination clausesrelated to legislation or regulations regarding public procurement projects) were not included in the analysis.

Furthermore, termination clauses in international commercial contracts are often influenced by the nature of these contracts. This has beencovered in this chapter to the extent that contract practice reflects the features of these specific contracts and to the extent that clauses expressingthese features have been encountered in the process of the analyses anddiscussions of the Working Group. For instance, distribution agreements,license agreements lO and financial agreements contain specific terminationprovisions that may be more detailed or more specific than terminationclauses in other international commercial contracts. These have also beenincluded in this chapter under the two qualifications mentioned above.

Furthermore, competition law (including merger control law) aspectsof termination clauses have also been left out of this Chapter, notwithstanding their importance and the frequency of competition-law-sensitiveprovisions in termination clauses.

Finally, the analysis was restricted to clauses in international contractsregulating termination, thus excluding termination contracts that parties mayconclude after termination of their business relationship (for instance, inthe course of a settlement) and in which the effects of the termination aredealt with.

1-\ For the European Union, see the harmonization achieved by Directive 86/653 ofDecember 18, 1986 on the coordination of the legislation of the member States regarding commercial agents, OJ L. 382 of December 31, 1986, 17-21. Other civil law countrieshave often similar rules providing some protection for commercial agents in case of termination of commercial agency contracts.

9 E.g., statutory provisions regarding consumer credit contracts or general conclitions which restrict possibilities to terminate consumer contracts. For the harmonizationof the law on general conditions within the European Union, see Council Directive93/13 of April 5, 1993 regarding unfair contract terms in consumer contracts, OJ L. 95,April 24, 1993,29-34.

10 For a discussion regarding these contracts, see J.M. Mousseron, op. cit., pp.615-676 with further references.


Because of the many differences both in terminology and in substanceof national laws regarding termination, it was unanimously decided that theproject could not go forward without national reports describing termination rules in some major jurisdictions. l1 Some members of the Group wereasked and accepted to provide such reports. In relation to termination law,reference is made to these reports on Belgian, Dutch, English, French,German, Italian, Spanish and Swiss law. 12

IV. ANALYSIS OF TERMINATION CLAUSES IN INTERNATIONAL CONTRACTSl3


Termination clauses cover a wide range of different situations including the possible termination of contracts as a result of:

1. nullity and voidability;2. the effect of a condition subsequent;3. an agreement by the contracting parties to terminate the contract

(mutuus dissensus) ;14

4. the performance of the contractual obligations;

11 National rules are particularly relevant in international commercial contracts.This raises the conflict of laws issue as to the law applicable to termination questions.Generally, the law governing contractual termination issues will be the law that appliesto the contract (lex fXlLlsae). For the European Union, the basis for this solution is setforth in Article 10 of the Rome 1980 Convention on the Law Applicable to ContractualObligations (OJ L. 266, October 9,1980,1-19).

12 These reports have been published in f.B.loj. 1997, 837-937 as annexes to theoriginal publication of the report on termination clauses. Adde: B. Mercadal, Conlrals eldmits de l'entrepJ7Se, lOth ed., Paris, Lefebvre, 2002, pp. 357-411; 1. Cherpillod, La/in descontrats de durie, Lausanne, CEDIDAC, 1988,275 pp.; La cessation des relations contractuellesd'affaires, Institut de Droit des Affaires, Aix-en-Provence, Presses Universitaires D'AixMarseille, 1997, 232 pp.; J. Gruber, Die Bf:fugnis des Darlehensgebers ZLlr Verlragsbeendigungbei inlernalionalen Kredilverlriigen, Bielefeld, Gieseking, 1997, 354 pp.; A. Brabant, Les11Ulrchis publics et prives dans la G.E.E. et outre-mel; Vol. I, Brussels, Bruylant, 1992, pp.518-540.

For a comparative overview, see G.H. Treitel, Remedies for breach of contract, inInlernalionalEru;ydo!Jedia o!Cmn!)(Lralive Law, The Hague, Mouton, 1976, 185 pp.

13 See on this subject: J.M. Mousseron, op. cit., 615-676; B. Mercadal, op. cit., pp.396-397 and 405-410; A.GJ. Berg, Drafting Commercial Agreements, London, Butterworths,1991, 134-137; R. Christou, BoilerfJlale Prar:lical Clauses, London, Financial Times Law &Tax, 2nd ed., 1995, pp. 35-48; D. Blanco, Nkf!;ocier elridiger un r;onlral inlernalional, Paris,Dunod, 1993, pp. 170-176; La fin du contrat, Association beIge des Juristes d'Entreprise,Brussels, 1993, 296 pp.

11 The termination agreement may not only follow from a new agreement betweenthe contracting parties but also from a contractual termination mechanism. For anexample of the latter, see the termination mechanisms injoint venture contracts relatedto deadlock (see the report on deadlock clauses in F. De Ly, Divorce Clauses inInternational Joint Venture Contracts, I.B.loJ., 1995, pp. 294-295 and 311-313).


5. definite impossiblity to perform resulting from force majeure,!'') frustration or hardship; J(j

6. default of a contracting party constituting a breach of contract andentitling the other party to have the contract terminated;

7. the passing of the period for which the contract has been concluded in case of fixed term contracts;

8. notice given by one party to the other party in case of contractsconcluded for an indefinite period;

9. some objective circumstances such as death ofa contracting party17or a party's involvement in insolvency, bankruptcy or similarproceedings.

This list of events or circumstances amounting to a termination of contracts is not exhaustive18 but reflects termination grounds that may befound in manyjurisdictions of both a civil and a common law background.To a large extent, these national laws on termination do not imposemandatory rules regarding contract termination, which means that thecontracting parties may themselves clarify or modifY termination aspects oftheir contractual relationship. The following will show to what extent contracting parties in international commercial contracts actually adaptnational laws regarding termination aspects of their contracts in order tomeet their respective needs. To the extent that some termination groundshave already been discussed in previous reports of the Working Group(particularly in relation to fora majeure and hardship), readers are referredto those chapters. One should also note that the existence of extensivelegal rules on termination in statutory instruments or in case law alreadyprovide a framework for contract regulation. Consequently, contract draftsmen tend to adapt or depart from these rules in view of the specificrequirements of individual contracts rather than to re-write them in termsof contractual provisions.

Since termination clauses are related to a variety of termination causes,all with their own features, the discussion hereafter will have to distinguishbetween these various grounds for termination (Sections rv.F through

15 See supra Chapter 8.

16 See SLlfJTfL Chapter 9.

17 This is related to physical persons as counter-parties to contracts. In internationalcommercial contracts, counterparties are, however, mostly legal persons. Therefore, thistermination basis will not be discussed in this chapter. No contractual provisions to thateffect have been found in the clauses that were the subject of the analysis.

IS In the national reports published with the original report, some other causes wereestablished (see I.H.loj., 1997,837-937). In this respect, one may cite grounds such asrepudiation of contracts, cancellation of contracts, voidance of contracts and termination based on anticipatory breach (for the latter, see M. Vanwijck-Alexandre, La resolution du contrat sur base de !'inexecution anticipee, I.B.LJ 2002, pp. 407-422).


IV.M). This analytical method has the advantage that the various termination mechanisms are better identified and described with emphasis onthese particular features. This approach, however, isolates the variousaspects of termination clauses therefore sketching only an incomplete picture, since many termination clauses bring together several terminationgrounds. The following example taken from the FIDIC Red Book19 illustrates this mixture of various termination grounds: breach of contract,hardship and objective terminating events:

"In the event of the Employer:

(a) failing to pay to the Contractor the amount due under any certificate of the Engineer within 28 days after the expiry of the timestated in Sub-Clause 60.10 within which payment is to be made,subject to any deduction that the Employer is entitled to makeunder the Contract, or

(b) interfering with or obstructing or refusing any requiredapproval to the issue of any such certificate, or

(c) becoming bankrupt or, being a company, going into liquidation, other than for the purpose of a scheme of reconstruction oramalgamation, or

(d) giving notice to the Contractor that for unforeseen reasons,due to economic dislocation, it is impossible for him to continueto meet his contractual obligations

the Contractor shall be entitled to terminate his employmentunder the Contract by giving notice to the Employer, with a copyto the Engineer. Such termination shall take effect 14 days afterthe giving of the notice."

For that reason, the examples cited hereafter may not be seen as sample termination clauses but are used only to illustrate the various elementsthat have been found in the termination clauses analyzed. It is sometimesdifficult to characterize termination grounds in order to determine inwhich category terminating events are to be placed. Moreover, this characterization process is often complicated by terminological imprecision onthe part of contract draftsmen. Before discussing the different terminationgrounds any further, some common characteristics of termination clauseswill be analyzed (Sections IV.B through IV.E).

19 Clause 69.1 (Default of Employer) of the Conditions of Contract for Works ofCivil Engineering Construction-The Red Book, FIDIC, Lausanne, 4th ed., 1989.


Finally, another general observation should be made. A growing tendency has been noted with contract negotiators and draftsmen, particularlyin contracts with parties of similar bargaining power, to look-much lessthan used to be the case-to termination not from the perspective of thecauses of termination and who is to blame for termination, but rather whenand how termination is to be achieved. This more objective approach hadalready been noted in the report on deadlock and divorce clauses in international joint venture contracts20 and has been found here also, albeit to amuch lesser degree. This difference might be explained by the fact thatjoint venture contracts are typically longer term cooperation contracts generally involving huge interests on both sides where it is important to findout ways that are acceptable to both parties. In such a configuration, oneis more inclined to draft the contract in terms of problem solution ratherthan in terms of blame and responsibilities. This same approach sometimesexists in termination clauses of other international commercial contracts:

"Si les licences d'exportation n'etaient pas obtenues ... I'Acheteurserait en droit de resilier Ie Contrat en totalite ou en partie."

or

"Si les deux parties reconnaissent que les defauts, vises au point14.14, dans certains types de l'equipement ne peuvent etre elimines, ou si, pour les eliminer, il faut plus de 6 mois, l'Acheteur auraIe droit de renoncer aux parties correspondantes du Contrat. Dansce cas, Ie Vendeur est oblige de rembourser aI'Acheteur la valeurde l'equipement livre et de payer une penalite de x% du montantde la partie resiliee du Contrat."

B. Headings

Various headings are used for termination clauses. In the clauses,which were analyzed, these were found:

Termination, Postponement and Termination, Termination andCancellation, Default, Default and Liquidation, Resiliation, Interruption of the Loan-Events of Default, Exigibilite anticipee,Acceleration of Maturity, Resiliation en Cas de Defaut, Discontinuation due to Contractor

These headings indicate that (1) the various grounds for terminationare not always clearly distinguished; or (2) in some cases, all terminationgrounds are brought together in one single termination clause.

20 F. De Ly, Divorce clauses in international joint venture contracts, I.H.I"}., 1995,pp.291-294.


C. The Location of Termination Clauses in the Contract

Termination clauses do not have a fixed place in the contract but aregenerally placed towards the end of the contract before the boilerplateclauses. Mostly, termination clauses are clearly identifiable contract clausesthat deal only with termination.

One might add that termination is sometimes, particularly in financeagreements, also mentioned in the Representation and Warranties part of thecontract. In that respect, at least one of the contracting parties states thatevents of default or termination events enumerated in the terminationclause do not exist at the time of the formation of the contract. This aspectwill not be covered in this chapter.

D. Relationship of Termination Clauses to Other Contracts

Often, international commercial contracting does not merely involveone single contract but several inter-related contracts may be concluded.Sometimes, this is referred to as contract groups (groupe de contrats). In thatcase, termination clauses may refer to previous contracts, contracts that areto be concluded at a later point in time or other contracts concluded withother parties such as group companies or sub-contractors. With regard topublic procurement, a pre-bid agreement contained the following termination clause:

"The Pre-Bid Agreement shall terminate on any of the followingoccurrences:

b) Failure of the Parties to agree upon the wording of the JointVenture Agreement, or

d) The Contract being awarded to a third party, or

f) The conclusion of the Joint Venture Agreement as per Clause4 hereof...."

In sub-contracting agreements, provisions may be inserted in orderto specify the effects of the termination of the main contract upon thesub-contract:

"Le present contrat est resilie de plein droit et sans aucune formalite:


lorsque Ie marche principal est lui-meme resilie sans qu'il y aitfaute de l'entrepreneur principal.

Dans ce cas, aucune indemnite n'est due de part ni d'autre.Toutefois, dans Ie cas ou une indemnite est versee par Ie maitre deI'ouvrage a l'entrepreneur principal, celui-ci est tenu de repartirentre les sous-traitants concernes, en proportion du prejudicequ'ils ont subi, la part d'indemnite correspondant au prejudiceretenu par Ie maitre d'ouvrage pour les travaux sous-traites."

E. Unilateral and Bilateral Termination Clauses

Termination clauses may be unilateral or bilateral. Unilateral termination clauses entitle only one of the contracting parties to terminate if thetermination event occurs. This may be related to the nature of the contract,as for instance, termination of contracts upon failure to proceed with thefee payment mechanism:

"The Contractor shall also be entitled to terminate the Contract bygiving 28 days notice to the Engineer and the Employer in any casewhere the Engineer has failed to issue a certificate of paymentupon proper application by the Contractor."21

Unilateral termination clauses may also give indications as to the parties' bargaining position in negotiating the contract. Public procurementcontracts in some countries do frequently provide for termination by reason of causes related to the performance of the contract by foreign companies, but do not state anything regarding termination related to theperformance of the contract by the procuring public authority.

Bilateral termination clauses entitle either party to terminate the contract upon the occurrence of a certain termination event. Bilateral termination clauses may be symmetrical or asymmetrical. They are symmetricalif the termination clause treats both parties alike. In asymmetrical clauses,a distinction is made between the position of the parties. The differenttreatment of a party is often based on their respective bargaining power.

F. Nullity and Voidability

Contract clauses seldom provide for the termination of the contract asa result of its nullity or voidability. This can probably be explained by thefact that rules on contract formation were traditionally considered mandatory, and contracting parties could not, by agreement, vary these rules or

21 Clause 33.7, last paragraph of the FIDICYellow Book (Conditions of Contract forElectrical and Mechanical Works, 3rd ed., 1988).


their effects. This traditional view is open to challenge but little researchhas been done regarding this issue.22 Contractual clauses regarding nullityor voidability of the contract were present in a limited number of cases. Ina first clause, the termination provision dealt with the termination effectsregarding bribery and corruption in a turn-key contract between commercial companies:

"Any commission, advantage, gift, gratuity, reward or bribe given,promised or offered by or on behalf of the Contractor or his agentor servants or any other person on this or their behalf to any officer, servant, representative, or agent of the Owner, the Architect,or the Project Manager or their Representative, or to any personon their behalf or any of them in relation to the obtaining or tothe execution of this or any other Contract with the Owner may inaddition to any criminal liability which may be thereby incurredsubject the Contractor to the cancellation of this and all otherContracts which he may have entered into with the Owner andalso to the payment of any loss or damage resulting from such cancellation. The Owner shall be entitled upon a certificate in writingfrom the Project Manager to deduct the amounts so certified fromany monies otherwise due to the Contractor under this or anyother Contract Agreement or to recover the said amounts as a debtdue or partly the one, and partly the other as the Owner shalldeem advisable."

In another case, a finance agreement provided that no early withdrawals could be made from the credit facility

"... if any statement made in this Loan Agreement or at the timeof its performance misleads the LENDERS in their application ofany substantial element of the BORROWER'S situation; ..."

In yet another finance agreement, the acceleration clause of a loan (i.e.,the provision according to which the loan or credit becomes due andpayable prematurely-clause d 'exigibilite anticipee) is set in operation

"Si l'un des evenements suivants venait ase produire, asavoir:

22 For one of the rare extensive discussions, see R. Moser, VertmgsabschlujJ, Ver"tJagsgultigkeit und Parteiwille irn internationalen Obligationenrecht, St. Gallen, Verlag derFehr'schen Buchhandlung, 1948, 253 pp. On this question, see also Chapter 1, pp.34-54; Chapter 3, pp. 146-168; and Chapter 7, pp. 353-356 and 387-388.


c) que l'une des declarations faites par l'EMPRUNTEUR ou touteattestation, engagement ou document signe par un representantde l'EMPRUNTEUR se revele inexact sur un point important; ..."

G. Condition Subsequent

Contract termination may be related to the intervention of uncertainevents in the future, which the parties have foreseen and the occurrence ofwhich are contractual grounds for termination (condition subsequent, condition resolutoire). In the context of public procurement, these conditionssubsequent are often related to decisions by the contracting public authority as to the adjudication of the public works or the approval of sub-contractors. The following is such an example:

"The Agreement will be terminated:

1. at the time the Parties hereto have entered into and signed thefinal Joint Venture Agreement referred to in Clause 7 of theAgreement.

3. if the Joint Venture is not successful in being awarded theContract, at the time when the Employer has issued a statementthat the Contract has been awarded to another Tenderer or thatthe Employer has abandoned the project and, in either event, thetender bond, which is to be supplied by the Joint Venture, hasbeen returned.

And at the latest, twenty four months after the date of signaturehereof."

Conditions subsequent automatically terminate the contract, whichforces the contracting parties to conclude a new contract if they shouldwant to do so. This may cause problems if one of the parties should wantto break the contract and re-negotiate the contract terms. In order toobtain more flexibility and to continue working within the existing contractual framework, the following adaptation or modification clause hadbeen inserted into a termination clause:

"Dans Ie cas oliia soumission serait annulee et un nouvel appeld'offre lance dans Ie delai de 12 mois apres la date de la premieresoumission, les Associes seraient engages par Ie present accordcomme s'il n'avait pas pris fin. Ce delai pourra etre prolonge d'uncommun accord des trois Associes."


H. Termination by Mutual Consent (Mutuus Dissensus)

Under the rules of contract law, the parties may not only freely conclude contracts but may also terminate them by mutual consent. There arefew termination clauses that deal with this possibility. This is probably to beexplained by the fact that the parties at the time of contracting do not payattention to this possibility since it is obvious that also, at a later date, during the life of the contract, they may still come to an agreement to terminate it. One of the few examples reads as follows:

"Furthermore, if both parties upon testing of the modified automatic press for X's own use find that the marketing of such modified automatic press is not a viable project then this agreementmay be terminated by mutual consent."

One may question whether this contract clause has any additive valuebut for the affirmation of the legal principle that parties by consent mayterminate contracts.

I. Performance

Contracts are also terminated if all the contractual obligations havebeen performed. Termination clauses, however, seldom provide anythingabout termination by performance. The following clause is an exception:

"12.1. This Agreement shall come into force on the date of signature hereof and shall terminate in the event of anyone of the following circumstances occurring:

12.1.1. If the Contract has been entered into and has been fullyimplemented by the Joint Venture Partnership and the Employerwhen all rights and obligations as well as guarantees and liabilitiesof the Joint Venture Partnership have ceased and/or have beenfinally settled with the employer and any Third Party, and all rightsand obligations between the Parties in connection with thisAgreement have been finalized, and all differences or disputesbetween the Parties in connection with this Agreement have beenfinally settled...."

Sometimes, contract clauses provide procedures to determine if andwhen the contract has been fully completed and then terminated. Forinstance, clause 62.1 (Defects Liability Certificate) of the FIDIC Red Book23

stipulates as follows:

23 Conditions of Contract for Works of Civil Engineering Construction-The RedBook, FIDIC, Lausanne, 4th ed., 1989.


"The Contract shall not be considered as completed until a DefectsLiability Certificate shall have been signed by the Engineer anddelivered to the Employer, with a copy to the Contractor, statingthe date on which the Contractor shall have completed his obligations to execute and complete the Works and remedy any defectstherein to the Engineer's satisfaction."

J. Breach of Contract 24

Under general contract law in manyjurisdictions, a court or arbitral tribunal may terminate the contract if either party defaults in relation to theperformance of its contractual obligations when there is no excuse for suchnon-performance (such as force majeure). In manyjurisdictions, terminationis, however, not automatic and the court has some discretion in assessingwhether the contract is to be terminated. Furthermore, the contractingparty asking for termination generally has to observe a number of substantive and formal requirements before a court may grant its demand fortermination. In one sample, this system has been followed expressly by anasymmetric termination provision under which default on the part of acontractor led to automatic termination of the turn-key contract. The contract provided as follows regarding default of the owner of the premises:

"For reasons described in Subclause 68 (l) b, the Contractor shallnot be entitled to terminate his Contract, unless the Owner isjudged to be in default by arbitration in accordance with the rulesof arbitration specified under Clause 66 herein."

Court intervention in the termination process will slow down thatprocess and has the disadvantage that it is uncertain and unpredictablewhether termination will ensue. These drawbacks do not appeal to businessmen, particularly in international commercial transactions. For thesereasons, contract practice has developed the technique of express termination terms (clauses resolutoires expresses).

The following is an example of such a terminating provision, whichis drafted broadly encompassing a breach of any obligation under thecontract:

"In the event that either of the Joint Venturers ...

(b) shall be in breach of its obligations under Clause 6 hereof orany other of its obligations under this Agreement ... then and inany such event the other Joint Venturer ... shall have the following rights ...

24 See Les sanctions de l'inexecution des obligations contractuelles. Etudes de droit compare,M. Fontaine & G. Viney (eels.), Paris/Brussels, L.G.DJ./Bruylant, 2001,1097 pp.


(i) to terminate the Joint Venture and this Agreement ..."

or

"Chacune des Parties aura la faculte de resilier tout ou partie duContrat en cas de violation par l'autre Partie de ses prestations."

Termination clauses sometimes contain lists of terminating events.Regarding breach of contract, such clauses enumerate the violated obligations that may trigger the application of the termination clause. Theseclauses may be unilateral, bilateral and symmetric or bilateral and asymmetric. Where the bargaining power of one of the contracting parties isstrong, for instance, regarding public procurement with many competitors,the procuring authorities are able to make long lists of causes for breachjustifying the termination of the contract. In this regard, one analyzed contract contains a four-page termination clause with 14 terminating events. Inthe banking business, one also finds extensive termination clauses enablingthe bank or other financial institution to terminate the contract immediately or to terminate any facility and accelerate re-payment upon the occurrence of certain enumerated events of default. Such a list is usually verylong in international financial agreements and may take many pages. Inthat context, an event of default will normally trigger the operation of theacceleration clause. Any such mechanisms are strictly enforced and certaincontracts provide expreSSly that the borrower does not have any defenseagainst the request for full and immediate repayment:

"... whereupon all those amounts shall become immediately dueand payable, all without diligence, presentment, demand or payment, protest or notice of any kind, which are expreSSly waived bythe Borrower."

Sometimes, contract provisions determine that a mere single breachdoes not suffice to trigger the application of the termination clause:

• "If the Contractor is not executing the Works in accordance withthe Contract or is neglecting to perform his obligations thereunder so as seriously to affect the carrying out of the Works, theEngineer may give notice to the Contractor requiring him to makegood such failure or neglect."25

• "... if the Engineer certifies to the Employer, with a copy to theContractor, that, in his opinion, the Contractor:

25 Clause 45.1 (Notice of Default) of the FIDICYellow Book (Conditions of Contractfor Electrical and Mechanical Works, 3rd ed., 1988).


"(d) ... despite previous warning from the Engineer, in writing, isotherwise persistently or flagrantly neglecting to comply with anyof his obligations under the Contract, ...then the Employer may, after giving 14 days' notice to theContractor, enter upon the Site and the Works and terminate theemployment of the Contractor without thereby releasing theContractor from any of his obligations or liabilities under theContract, or affecting the rights and authorities conferred on theEmployer or the Engineer by the Contract, ... "26

• "L'Administration sera en droit de proceder a la resiliation de ceContrat en cas de carence grave de l'Entrepreneur dans l'execution des obligations qui lui incombent selon les stipulations de ceContrat et ce, a l'expiration d'une mise en demeure donnee parlettre recommandee et restee sans effet dans un deIai de 30(Trente) jours ..."

• "La Banque pourra a tout moment mettre fin unilateralement auxobligations resultant pour elle de la presente Convention ... dansles cas suivants:"- Pour Ie cas 011 l'Emprunteur ne paierait pas a une date

d' echeance quelconque toutes sommes dues au titre de lapresente Convention, a moins que cette defaillance ne sepoursuive pas au-dela d'un delai de 10 jours...."

The latter example, frequently included in finance agreements, is preferable to the open criteria regarding the seriousness of the breach of the otherabove-mentioned clauses (seriously to affect the carrying out of the Works, persistently orjlag;rantly neglecting to comply, canmce grave). A strict criterion (such asa period of continuing breach) is, however, easier to use and define for payment obligations than for other obligations where the breach itself is moredifficult to establish and to assess. Bank documents furthermore often allowa grace period for interest payments but not for capital.

Very often, termination clauses provide some formal requirementsfor any such termination in case of non-performance due to breach ofcontract:

• "La Partie qui invoquerait une telle violation notifiera a l'autrePartie par lettre recommandee avec accuse de reception ..."

• "... if the Employer does not pay to the Contractor any amountproperly due under clauses 31.1 and 31.2 within 14 days and continues such default for 7 days after receipt by registered post of anotice from the Contractor stating that notice of termination

26 Clause 63.1 (Default of Contractor) of the Conditions of Contract for Works ofCivil Engineering Construction-The Red Book, FIDIC, Lausanne, 4th ed., 1989.


under clause 28 will be served if payment is not made within 7 daysfrom receipt thereof; ..."

Because of the immediate and possibly harsh effects of the operationof these clauses, provisions have been inserted that allow the defaultingparty to remedy its breach. These rights to cure, which are also known insome national laws (e.g., the Nachfrist in German law or relief against forfeiture in English law), provide the conditions and periods within whichthe defaulting party is to remedy its breach:

"In the event that either of the Joint Venturers ... shall be inbreach of its obligations ... and shall not remedy such breachwithin twenty eight days after having been required by theManagement Board in writing to remedy such breach then ..."

Some clauses deal with the problem of subsequent contract breaches.In practice, this may be important, since a party may, under the applicablenational law, be required to react immediately upon the occurrence of anysuch breach in the absence of which he may be deemed to have waived hisright to invoke the breach and the termination of the contract. Two examples of any such clauses can be given:

• "If the Contractor either shall continue such default for 14 daysafter receipt of such notice or shall at any time thereafter repeatsuch default (whether previously repeated or not) then theEmployer may within 15 days after such continuance or repetitionby notice by registered post forthwith terminate the employmentof the Contractor under this Contract, provided that such noticeshall not be given unreasonably or vexatiously."

• "In no event may any delay in exercising the LENDERS' right torequire advance repayment be interpreted as a waiver of this right."

K. Passing of a Fixed Period

Under national law, fixed term contracts terminate automatically byoperation of law upon the passing of the period for which they were concluded. Termination clauses in international commercial contracts oftenapply this rule, sometimes in combination with other termination grounds:

• "... this agreement shall (unless extended by mutual agreement)expire or terminate at the earliest of the following events:(a) one (1) year after the date of this agreement or(b) thirty (30) days after written notice of termination provided byeither party to the other."

• "This Agreement shall remain in force from the Effective Date (asdefined in Article 13 hereof) until the Completion Date ..."


• "This Authorization Agreement expires on unless onor before that date Buyer ..."

Termination clauses sometimes regulate the effects when the contracting parties continue to execute the contract notwithstanding its expiration. These clauses may provide that a new contract for an identicalperiod is deemed to be concluded (evergreen clauses) or that the contractwill continue to exist for an indefinite period. 27

L. Termination at WiII 28

Under some national laws, certain special category contracts may beterminated at will. For instance, in France and Belgium some constructioncontracts may be terminated by the owner under Article 1794 of theFrench and Belgian Civil Codes. Termination clauses sometimes adopt thistechnique and make it a contractual termination ground even if the governing law is not French or Belgian or if the statutory requirements ofthese laws are not met. The following is an example of such a terminationclause in an engineering contract:

"In addition to COMPANY's right set forth in article 17 COMPANYhas the right at any time, at its absolute discretion, to terminate theCONTRACT without any notice of default or judicial interventionbeing required for the purpose."

Similar termination-at-will-clauses have been encountered in other contexts. For instance, in an agreement between consortium partners intending to bid for a public procurement project, either partner had the rightnot to join in the tender:

"Furthermore, either Party has the right to recede from this Agreement, on receipt and after review of tender documents ..."

Furthermore, most national legal systems acknowledge termination atwill regarding contracts concluded for an indefinite period. Terminationat will operates then as a technique to enable contracting parties to freethemselves from obligations that otherwise would be perpetual. In mostcases, notice is to be given to the other party before termination can takeeffect. Based on principles of good faith and equity, any such terminationmay not come as a surprise attack upon the other party, and a minimalnotice period is to be observed; generally, this notice period is rather short.

27 See B. Kohl, Les clauses qui organisent la poursuite des relations contractuelles,I.R.I"j., 2002, pp. 443-460.

28 See R. Zimmermann & S. Whittaker, Good Faith in EumfJean Contnu;t Law,Cambridge University Press, 2000, pp. 532-556.


M. Objective Termination Events29

Termination clauses frequently provide for termination upon theoccurrence of some objective terminating events. In that respect, insolvencyor bankruptcy clauses are most commonly used. These clauses provide forautomatic termination of the contract when one or either party is involvedin insolvency, bankruptcy or related proceedings. In this regard, one maynote that most national laws do not have a general rule of contract lawunder which contracts are, by law, terminated upon a debtor's insolvency.Thus, insolvency is, as such, not a general termination ground, and themere fact of a party's insolvency does not constitute breach of contract. 3D

Exceptionally, some specific contracts are under the applicable national lawterminated as a result of insolvency.31 Contract clauses providing for termination upon insolvency are thus needed in those cases when, undernational law, insolvency does not, ipso facto, terminate the contract andwhere the contracting parties do not want to continue working with oneanother in circumstances of insolvency. Insolvency and bankruptcy clausesdo have a second function, since they clarify how insolvency is to bedefined and state the conditions and procedures for any such termination.As one will see from the examples cited below, these clauses extend theirreach from insolvency to payment or attachment problems and, more generally, to these cases where doubts are raised about the financial capabilities of a contracting party to perform under the contract. Mostly, insolvencyand bankruptcy clauses tend to formule quite precisely under what circumstances the contract may be terminated:

• "Should any party go into liquidation or be wound up because ofinability to pay its debts or compound with its creditors or beplaced in the hands of the Receiver, then the other party shall beentitled to terminate this Agreement vis-a-vis the defaulting partywith effect from the date of default and without prejudice to theobligation of the defaulting party or its representative to bear itsproportionate share of the loss, resulting or to result from the JointVenture and to any right of action."

• "In the event that either of the Joint Venturers ..."(a) is insolvent or makes a composition or arrangement with itscreditors or has a winding up order made or (except for the purposes of amalgamation or reconstruction) a resolution for voluntary winding up is passed or a provisional liquidator receiver or

29 Under French law, see particularly C. Paulin, La clause rl:Sohlloire, Paris, L.G.DJ.,1996, 329 pp.

30 Also, insolvency and bankruptcy clauses may often not qualifY as conditions subsequent since the condition is not extraneous to one of the contracting parties.

31 See the national reports in I.B.LJ, 1997, pp. 837-937.


manager of its business or undertaking is duly appointed or wherepossession is taken by or on behalf of the holders of any debentures secured by a floating charge on any property comprised in orsubject to the floating charge; ...then and in any event the other Joint Venturer ... shall have thefollowing rights ..."(i) to terminate the Joint Venture and this Agreement"(ii) to exclude the Defaulting Party from further participation inthe management of the Joint Venture and of the Contract and theprofits arising therefrom ..."

• "If the Contractor is deemed by law unable to pay his debts as theyfall due, or enters into voluntary or involuntary bankruptcy, liquidation or dissolution (other than a voluntary liquidation for thepurposes of amalgamation or reconstruction), or becomes insolvent, or makes an arrangement with, or assignment in favour of,his creditors, or agrees to carry out the Contract under a committee of inspection of his creditors, or if a receiver, administrator,trustee or liquidator is appointed over any substantial part of hisassets, or if, under any law or regulation relating to reorganization,arrangement or readjustment of debts, proceedings are commenced against the Contractor or resolutions passed in connection with dissolution or liquidation or if any steps are taken toenforce any security interest over a substantial part of the assets ofthe Contractor, or if any act is done or event occurs with respect tothe Contractor or his assets which, under any applicable law has asubstantially similar effect to any of the foregoing acts or events, orif the Contractor has contravened Sub-Clause 3.1, or has an execution levied on his goods, ... then the Employer may, after giving14 days' notice to the Contractor, enter upon the Site and theWorks and terminate the employment of the Contractor ... "32

Sometimes, clauses expressly refer the question of interpretation andapplication to the court or arbitral tribunal having jurisdiction:

"... In the event that Contractor has reason to believe that theOwner may default for such reasons he may refer the matter toarbitration to make a determination in accordance with the rulesof arbitration specified under Clause 66 herein."

Apart from the relatively strict definitions used in the above-mentionedinsolvency and bankruptcy clauses, one may also find a more open and

32 Clause 63.1 (Default of Contractor) of the Conditions of Contract for Works ofCivil Engineering Construction-The Red Book, FIDIC, Lausanne, 4th ed., 1989; compare with the much shorter provision of Clause 45.2 of the FIDIC Yellow Book(Conditions of Contract for Electrical and Mechanical Works, 3rd ed., 1988).


judgmental specification in some of these clauses. Such an approach is,however, rare. For an example of that approach:

"Le contrat passe avec Ie Sous-traitant pourra etre resilie parl'Entrepreneur Principal dans les cas suivants:

"7-pour deces, cessation ou dissolution d' entreprise, depot debilan, reglement judiciaire meme si Ie sous-traitant etaitautorise a poursuivre son activite, liquidation de biens, suspension provisoire des poursuites et plus generalement danstous les cas mIla situation du Sous-traitant se trouve modifieedans des conditions telles que les garanties techniques oufinancieres qu'il presente ne sont plus compatibles avec lanature ou l'importance des travaux qui lui sont confies."

The effects of insolvency and bankruptcy clauses may not only bededuced from the clauses themselves but should carefully be read in conjunction with the applicable law. Some bankruptcy and insolvency laws provide or imply that contracts, which are in force at the date of insolvency,may be continued thereafter by operation of law or by an order of thebankruptcy or insolvency officer or receiver. Given the mandatory character of these rules, the practical impact of insolvency and bankruptcy clausesis dependent on the position taken in the insolvency or bankruptcy jurisdiction regarding the continuation of the contract.33 One clause illustratesthis point:

"Constitue un Cas de Defaut pour l'une des Parties, ci-apres laPartie Defaillante, l'un des evenements suivants:

8.1.1.6.

sous reserve du droit applicable a cette procedure, ouvertured'une procedure de liquidation amiable ou d'une procedure collective de reglement du passif; ... "34

Although insolvency and bankruptcy are the major examples of objective terminating events, many other events figure in termination clauses.

33 See in this respect, the national reports in I.B.LJ, 1997,837-937. With respect toFrance, B. Mercadal, op. cit., pp. 577-581.

34 Article 8.1. Resiliation en Cas de Defaut, Conditions Generales AFB pour lesoperations d'echange de devises etlou de conditions d'interets, Association fran~aise

des Banques, March 1987.


However, these clauses do not always come into play automatically butoften couple the objective event with a termination right. This implies thatthese events entitle a contracting party to termination but do not obligehim to do so. In that respect, these clauses are much more flexible thaninsolvency and bankruptcy clauses. These clauses are generally differentfrom other termination clauses, such as those discussed above underSections N.C, NJ and N.L, since the termination rights are unrelated toconditions subsequent, indefinite term contracts or breach of contract.Unlike many conditions subsequent, they do not work automatically. Also,they do not follow from the indefinite term character of the contract thatenables a contracting party to terminate by giving notice. Finally, the terminating events under these clauses (often called Events of Default) arenot expressing non-performance due to breach but determine conditionsunder which the parties no longer want to be bound by their contractualrelationship. Characterization of these clauses remains difficult since someof these clauses might be interpreted to express hardship events althoughin many cases the severe conditions of hardship will not be met. The following example will illustrate:

"Si les licences d'exportation n'etaient pas obtenues ou si, avantl'achevement de l'execution du Contrat, elles etaient retirees parles autorites responsables ou si leur validite etait expiree, ou si Iecertificat du Vendeur confirmant que la licence n'est pas necessaire se trouve non valable (par suite de l'intervention des autoritesresponsables du pays du Vendeur), l'Acheteur serait en droit deresilier Ie contrat en totalite ou en partie."

The practice of extensively enumerating terminating events is particularly frequent in the finance community where they are contained in termination clauses in loans and other credit arrangements. 3S For example:

• "If one or more of the following events of default (each an 'Event ofDefault') shall occur and be continuing, the Loan Agent and theBanks shall be entitled to the remedies set forth in Section 12.2:

(h) without the prior written consent of the Majority Banks, theBorrower sells or otherwise disposes of all or a substantial part of itsassets or ceases or threatens to cease to conduct all or a substantialpart of its business as now conducted, or merges or consolidates withany other company unless the purchaser or transferee or the otherparty to such merger or consolidation is any of the Borrower'sAffiliates and is capable of complying with and does comply with all

35 See also S. Stijns, De beeindiging van de kredietovereenkomst: macht en onmachtvan de (kort geding)-rechter/La denonciation du credit: les pouvoirs dujuge du fondet dujuge des referes, Revue de droit r;ornrnen;ial belge, 1996, pp. 100-167.


the representations, undertakings, covenants and obligations of theBorrower hereunder as if all references in this Agreement to 'theBorrower and any of its Mfiliates' were references to 'that Personand any of its Mfiliates'; or(i) without the prior written consent of the Majority Banks, any ofthe Borrower's Mfiliates sells or otherwise disposes of all or a substantial part of its assets or ceases or threatens to cease to conductall or a substantial part of its business as now conducted, or mergesor consolidates with any other company and such sale, disposal,cessation, merger or consolidation might, in the opinion of theMajority Banks, materially and adversely affect the Borrower's ability to perform any of its obligations hereunder unless the purchaser or transferee or the other party to such merger orconsolidation is the Borrower or another of its Mfiliates; ...

(k) A final judgment or order for the payment of money in excessof U.S. $ (or its equivalent in another currency) shall berendered against the Borrower or any Agency and either (i)enforcement proceedings shall have commenced by any creditorupon such judgment or order or (ii) a stay of enforcement of suchjudgment or order, by reason of a pending appeal or otherwise,shall not be in effect for any period of 10 consecutive days;then, ... , the Bank may declare its obligation to makeAdvances to be terminated "

N. Partial Termination

Termination clauses generally envisage the complete termination ofthe contract. In some cases, however, partial termination had been considered and regulated:

• "Si les licences d'exportation n'etaient pas obtenues ou si, avantl'achevement de l'execution du Contrat, elles etaient retirees parles autorites responsables ou si leur validite etait expiree, ou si Iecertificat du Vendeur confirmant que la licence n'est pas necessaire se trouve non valable (par suite de l'intervention desautorites responsables du pays du Vendeur), l'Acheteur serait endroit de resilier Ie contrat en totalite ou en partie.Dans ce cas, Ie Vendeur remboursera les acomptes correspondanta la partie resiliee du Contrat, avec majoration pour interets autaux annuel de x%."

• "Si les deux parties reconnaissent que les defauts, vises au point14.14, dans certains types de l' equipement ne peuvent etre eIimines, ou si, pour les eIiminer, il faut plus de 6 mois, l'Acheteur auraIe droit de renoncer aux parties correspondantes du Contrat. Dans


ce cas, Ie Vendeur est oblige de rembourser a l'Acheteur la valeurde l'equipement livre et de payer une penalite de x% du montantde la partie resiliee du Contrat.Les conditions du present point ne constitueront pas un precedentpour les affaires ulterieures."

O. Consequences of the Application of the Termination Clause

Some, but far from all, termination clauses pay attention to the effectsof the termination. Basically, two different attitudes have been found regarding the effects of the contract termination on the contracting parties' rightsand obligations. In the first approach, all contractual rights and obligationsseem to terminate except for those enumerated in the contract. Under thesecond approach, the contract continues to exist until all differences anddisputes have been solved. These are examples of this approach:

• "The Pre-Bid Agreement shall terminate on any of the followingoccurrences:

But in any event ... not before:-The Bid Bond has been returned,-A final settlement of all differences or disputes and all accountsbetween the Parties has taken place."

• "12.1. This Agreement shall come into force on the date of signature hereof and shall terminate in the event of anyone of the following circumstances occurring:

12.1.1. If the Contract has been entered into and has been fullyimplemented by the Joint Venture Partnership and the Employerwhen all rights and obligations as well as guarantees and liabilitiesof the Joint Venture Partnership have ceased and/or have beenfinally settled with the employer and any Third Party, and all rightsand obligations between the Parties in connection with thisAgreement have been finalized, and all differences or disputesbetween the Parties in connection with this Agreement have beenfinally settled.12.2. Upon such termination, the rights of the Parties to make anyclaims against each other shall cease forthwith."

• "L'Association creee ce jour entrera en vigueur avec la signaturede tous les Associes. Elle durerajusqu'a ce que:

2) La soumission soit acceptee; alors l'Association prendra fin auplus tard avec l'apurement definitif de tous les comptes quiseraient la consequence directe ou indirecte de son objet, tant avecIe Maitre d'Ouvrage qu'avec les tiers ou entre Associes.


Meme apres cette date, les Associes resteront lies jusqu'a l'extinction de toutes les obligations legales et contractuelles resultant dumarche ou des marches qui auront ete conclus, a moins qu'il n'ensoit autrement convenu d'un commun accord lors de la dissolution de laJoint Venture."36

Sometimes, the life of the contract may, by operation of these clauses,be prolonged for a considerable period as in the following example:

"... Sub-Contractor shall remain bound by the present SubContract during the period of time covered by the duration of theguarantees imposed upon Sub-Contractor by the present SubContract, and by the clauses of the Main Contract applicable to itsdeliveries and Works."

Termination clauses also often provide for the remedies that followupon termination:

• "La Partie lesee pourra en outre demander a la Partie dont Ie comportement a entraine la resiliation anticipee du Contrat des dommages et interets en reparation du prejudice qu'a pu lui causer lacaducite du Contrat."

• "... Dans Ie cas ou apres l'expiration de ce delai les defauts neseraient pas elimines, I'Acheteur a Ie droit de renoncer a l'equipement defectueux et de demander de Ie remplacer par un equipement de bonne qualite ou resilier Ie Contrat dans sa partieconcernant l'equipement defectueux."

• "The terminated party shall bear all the costs arising out of or inconnection with termination."

Sometimes, detailed termination procedures have been provided foras in this case:

• "The Engineer shall, as soon as possible after such termination,certify the value of the Works and all sums then due to the Contractor as at the date of termination in accordance with Clause 33.The Employer shall not be liable to make any further payments tothe Contractor until the Works have been completed. When theWorks are so complete, the Employer shall be entitled to recoverfrom the Contractor the extra costs, if any, of completing theWorks after allowing for any sum due to the Contractor under Sub-

36 In this case, the contractual provision treats both the effect of termination on theparties' rights and obligations and the way the contract termination is to be effected(apurement de taus les comptes). The termination clause should ideally distinguish moreclearly between these two elements.


Clause 45.3. If there is no such extra cost the Employer shall pay anybalance due to the Contractor."37

• "In the event of such termination the Employer shall pay theContractor an amount calculated in accordance with Sub-Clause44.8.38 The Employer shall pay in addition the amount of any lossor damage, including loss of profit which the Contractor may havesuffered in consequence of termination. The additional amountshall, however, not exceed the limit specified in the Preamble."39

• "... the Contractor shall allow or pay to the Employer in the manner hereinafter appearing the amount of any direct loss and/or

37 Clause 45.3 (Valuation at Date of Termination) and 45.4 (Payment after Termination) of the FIDIC Yellow Book (Conditions of Contract for Electrical and MechanicalWorks, 3rd ed., 1987); see also clause 63.2 and 63.3 of the Conditions of Contractfor Works of Civil Engineering Construction-The Red Book, FIDIC, Lausanne, 4theel., 1989.

38 This clause relating to payment on termination due to force majeure provides asfollows:

"If the Contract is terminated under Sub-Clause 44.7 the contractor shallbe paid the value of the work done.

The Contractor shall also be entitled to receive:

(a) the amounts payable in respect of any preliminary items so far as thework or service comprised therein has been carried out and a proper proportion of any such item in which the work or service comprised has onlybeen partially carried out,

(b) the cost of materials or goods ordered for the Works or for use in connection with the Works which have been delivered to the Contractor or ofwhich the Contractor is legally liable to accept delivery. Such materials orgoods shall become the property of and be at the risk of the Employerwhen paid for by the Employer and the Contract shall place the same at theEmployer's disposal,

(c) the amount of any other expenditure which in the circumstances wasreasonably incurred by the Contractor in the expectation of completing thewhole of the Works,

(d) the reasonable cost of removal of Contractor's Equipment from the Siteand the return thereof to the Contractor's works in his country or to anyother destination at no greater cost, and

(e) the reasonable cost of repatriation of the Contractor's staff and workmen employed wholly in connection with the Works at the date of such termination."

39 Clause 46.3 (Payment on Termination for Employer's Default) of the FIDIC YellowBook (Conditions of Contract for Electrical and Mechanical Works, 3rd ed., 1987); see alsoclause 69.3 (Payment of Termination) of the Conditions of Contract for Works of CivilEngineering Construction-The Red Book, FIDIC, Lausanne, 4th ed., 1989.


damage caused to the Employer by the termination. Until aftercompletion of the Works under clause 27.3.2 the Employer shallnot be bound by any provision of this Contract to make any furtherpayment to the Contractor but upon such completion and the verification within a reasonable time of the accounts therefor theEmployer shall state the amount of expenses properly incurred bythe Employer and the amount of any direct loss and/or damagecaused to the Employer by the termination and, if such amountswhen added to the monies paid to the Contractor before the dateof termination exceed the total amount which would have beenpayable on due completion in accordance with this Contract, thedifference shall be a debt payable to the Employer by theContractor, and if the said amounts when added to the said moniesbe less than the said total amount, the difference shall be a debtpayable by the Employer to the Contractor."

These clauses set forth the manner in which the termination of thecontract is to be implemented and the way compensation for terminationis determined. Various methods have been developed. One method is thelump-sum method, which determines, in advance, the damages to be paid.This method has been analyzed in another chapter to which reference ismade.40 In some cases, a ceiling is put on the liability of a contracting partyunder the termination clause by means of an overall liquidation and penaldamages clause:

"Notwithstanding anything to the contrary in the Conditions thetotal financial liability of the Contractor under clause 27 shall,including any liability for liquidated and ascertained damages, belimited to an amount equivalent to 10% of the original ContractPrice and the Owner shall indemnify the Contractor against anyexpense, liability, loss, claim or proceedings whatsoever in excessof the said limitation of liability."

Other methods, such as those cited earlier, refer to the contract valueto determine the amount of damages or compensation. Various options areopen. The termination clause may consider including or excluding compensation for loss of profit, indirect damages, termination charges paid tosub-contractors and the value of residual assets. It is advisable that the various elements of the compensation to be paid be clearly identified in thecontract. An example of a clause where some items of the compensationare specified follows:

• "A Defaulting Party shall, on demand, indemnify and hold harmless the Designating Party for and against all reasonable out-of-

40 See sU!Jr(J" Chapter 7.


pocket expenses, including attorney's fees, incurred by theDesignating Party by reason of the enforcement and protection ofits rights under this Master Agreement or any Rate ProtectionAgreement, including, but not limited to, costs of collection."

• "If the cause of termination is the default of either party hereto theother party shall be entitled in addition to be paid its reasonablecosts and expenses connected with or arising from the terminationnot included in the Account submitted under sub-Clause (A)above and any additional damages to which such other party maybe entitled at law. The parties hereto shall within 6 (six) months ofthe date of termination agree the amounts payable under this subClause and shall record their agreement by exchange of letters.Failing agreement within such period the matter in dispute shallbe referred to Arbitration in accordance with Clause 24 hereof."

Sometimes, the assessment or calculation of the compensation is leftto one of the parties:

"The parties further agree that a statement in reasonable detailby the Designating Party in good faith showing the calculation ofthe foregoing amounts shall be conclusive in the absence of manifest error."

In complex cases, the procedure to determine compensation will haveto involve auditors or other specialists. It is advisable that the appointmentof these specialist, their mandate, the payment of their fees and the natureof their opinions is clearly settled in the contract. The specialist may beappointed by one party as in this case:

"The actual costs referred to under a. of article 17.3 shall be examined and certified as sound by external auditors appointed byCOMPANY All costs involved therein shall come to CONTRACTOR's account."

Sometimes, the contract provides for the identity of the nominatedexpert and his mandate as in the following sample:

"In the event of complete or partial termination of this Agreementfor any reason whatsoever, the Corporation shall ... submit anaccount in writing ...

The said Account shall be accompanied by a Report fromChartered Accountants who acting as Experts shall report whetheror not in their expert opinion the Account has been properly prepared in accordance with this Clause whereupon such Account


and Report shall be conclusive and binding upon ... and theCorporation. "1\

In their provisions regarding the effects of termination, much attention is paid to the remedies available to the aggrieved party. However, theobligations of that party under those circumstances is barely addressed. Inone clause, mention was made of this party's obligation to mitigate theother party's losses:

"The Non-Defaulting Party shall be entitled to:

(ii) make or attempt to make arrangements to avoid, mitigate orreduce the losses which would, or which, in the opinion of theNon-Defaulting Party, might, otherwise arise from such termination; ..."

In some cases, it is expressly and cautiously stated that the remediesenumerated in the contract do not exclude any other remedies that maybe available under the applicable law:

"... the other Joint Venturer (hereafter called "the ContinuingParty") shall have the following rights (without prejudice to anyother rights and remedies of the Continuing Party against theDefaulting Party under common law statute or otherwise) ..."

At the other side of the spectrum, the termination clause may providefor an exemption clause such as the following:

"Dans aucune des circonstances ci-avant, Ie Franchise n'aura aucundroit areclamer des dommages et intef(~~ts du chef de la resiliationintervenue du Contrat."12

In practice, there may be important questions as to how to solve disputesbetween the contracting parties in the period between the moment that itbecomes clear that termination will follow and the moment that nationalcourts or arbitral tribunals may rule on the substance of the claims of eitherparty in relation to such termination. Absent contractual provisions, the par-

41 The interpretation of this termination clause has been the subject of an ICC arbitral procedure where the arbitral tribunal in a partial final award has held that termination accounts that were not prepared by an expert appointed by both parties inaccordance with the contractual clause, were not binding (Case 7071, Partial FinalAward dated January 28,1996, unpublished).

12 See supra, Chapter 7.


ties will have to seek amicable solutions to these interim problems or willhave to seek provisional measures before national courts or arbitrators. Somecontractual provisions deal to a certain extent with these issues:

• "... the Employer may, after having given 7 days notice to theContractor, terminate the Contract and expel the Contractor fromthe Site.

The Employer may upon such termination complete the Workshimself or by any other contractor."13

• "The Contractor shall be entitled to remove immediately allContractor's Equipment which is on the Site."44

• "... Contractor shall immediately or upon such other date as isspecified in the notification discontinue its performance ofWORK, or the relevant part thereof, and shall assign to COMPANY,or its nominee, all rights and titles referred to in article 4.4 ..."

The examples just given reflect the fact that the contracting parties, intheir contracts, insert provisions containing obligations that survive the contract or that come into play at the termination of their contractual bonds.The former clauses have already been analyzed in a different chapter andrelate, inter alia, to issues such as inventory and stock available at termination, return of documents, removal of equipment, buildings or advertisement boards or client orders coming in after termination.45 It is obviousfrom those analyses, and from many examples in this section, that the concept of termination itself is, in this regard, often ambiguous and that the termination clause either expressly or impliedly does not exclude that certainprovisions (the applicable law clause, the dispute resolution clause, confidentiality clauses and clauses in restraint of trade) continue to be in effectdespite the so-called termination of the contract. Further reference is madeto the analyses in the following chapter. As to clauses intended to becomeoperational upon termination, the following may be cited:

• "The Employer may employ and pay other persons to carry outand complete the design and construction of the Works and he orthey may enter upon the Works and use all temporary buildings,

13 Article 45.2 (Contractor's Default) of the FIDIC Yellow Book (Conditions ofContract for Electrical and Mechanical Works, 3rd ed., 1987); compare with clause 63.1of the Conditions of Contract for Works of Civil Engineering Construction-The RedBook, FIDIC, Lausanne, 4th ed., 1989.

11 Article 46.2 (Removal of Contractor's Equipment) of the FIDIC Yellow Book(Conditions of Contract for Electrical and Mechanical Works, 3rd ed., 1987); see alsoclause 69.2 of the Conditions of Contract for Works of Civil Engineering ConstructionThe Red Book, FIDIC, Lausanne, 4th eel., 1989.

15 See infra, Chapter 13.


plant, tolls, equipment, goods and materials intended for, delivered to and placed on or adjacent to the Works, and may purchaseall materials and goods necessary for the carrying out and completion of the Works."

• "... the Contractor shall if so required by the Employer within 14days of the date of termination, assign to the Employer withoutpayment the benefit of any agreement for the supply of materialsor goods and/or for the execution of any work for the purposes ofthis Contract but on the terms that a supplier or sub-contractorshall be entitled to make any reasonable objection to any furtherassignment thereof by the Employer."

• "... the Employer may pay any supplier or sub-contractor for anymaterials or goods delivered or works executed for the purposes ofthis Contract (whether before or after the date of termination) in sofar as the price thereof has not already been paid by the Contractor."

V. CONCLUSIONS

As has become tradition, reports prepared by the Working Group endwith some advice and suggestions to contract draftsmen. Naturally, it is recommended to be precise and accurate and to avoid ambiguity and repetition. Also, a well-drafted termination clause (at least as much as any otherclause) is defective without an adequate choice of law clause and consideration of procedures to resolve disputes.

In themselves, termination clauses vary so much according to the contractual context that we refrain from making more specific recommendations for general application. Hopefully, readers will benefit from theobvious defects of some of the clauses we have quoted and from their enormous variety.

CHAPTER 13

POST-CONTRACTUAL OBLIGATIONSIN INTERNATIONAL CONTRACTS

I. INTRODUCTION

The classical theory of obligations places the contract in a clearlydefined time period. A contract is made when the offer is accepted. It normally ends with the performance of the parties' obligations or on expiry ofthe term provided. It may end prematurely as a result of a specific incident,such as in a case of jor-ce majeur-e, the remission of a debt or termination dueto non-performance.

Upon examination, it becomes clear that, in practice, the temporal limits of contracts, especially international contracts, are often much less precise.

From the above chapter on letters ofintent,l it emerged that "upstream,"the demarcation between the period preceding the contract and the timethe contract was made often proved difficult to establish. The negotiationperiod, far from being a vacuum from a legal point of view, is, in fact, aperiod full of expressions of will. Commitments are made to organize thenegotiation. The contract itself is made progressively, by successive, moreand more detailed agreements. Sometimes, the parties even decide to startperforming the agreement before it has been entirely concluded.

What is the situation "downstream"? It appears that quite often thecontract does not terminate in a clear-cut way either. Although essentiallythe parties' obligations have been performed, the contract will not resignitself to die. It survives in a series of undertakings with which one or theother party continues to comply.2

These undertakings are of different types. Some arise out of pastevents. The situation, which the contract created between the parties, mustbe wound up: documents must be returned, necessary action taken withregard to stock, outstanding orders need to be dealt with, etc. Others, morecharacteristically, provide for a veritable extension into the future of con-

1 See sU!Jr(J" Chapter 1.

t This concept of contract law can be associated with the theory of relational contracts, referred to elsewhere in this volume (see supra, pp. 212-213 and infra, pp.625-628).

597


tractual relations, whether this involves maintaining in force certain obligations (for example a confidentiality clause or the obligation not tocompete), or the creation of new obligations (for example a loyalty commitment as to the conclusion of future contracts).

We shall attempt to provide a general overview, illustrated by clausestaken from the sample gathered and discussed by the Group (Section II),before setting out a few thoughts on the specific legal problems which mayarise from these post-contractual clauses (Section III).

One caveat should, however, be entered first. The expression post-contractualobligations is not, strictly speaking, correct. Rather, it is the contractitself that survives through these obligations. It is quite clear that the obligations in question also arise from the contract, by virtue of express stipulations, or even implicitly, and especially based on the principle thatagreements are to be performed in good faith. 3

The expression post-contractual obligations has the merit, however, ofemphasizing the fact that, essentially, the contract has been performed.The parties' principal obligations have been performed (or have ceased toexist for another reason). The goods sold, for example, have been delivered and the purchase price paid. However, the seller is still bound by hisguarantee against latent defects. The agency contract is finished after having been properly performed, but the agent is still bound by the obligationnot to compete.

Here is an example of the terminology used in practice:

"Termination of this agreement for whatever reason shall not ...affect or prejudice the rights and obligations of the parties pursuant to articles 5.1, 5.2, 9.8, 10.4, 10.6, 11.9 and 15.6, which arecontinuing in nature and shall survive termination."

II. POST-CONTRACTUAL OBLIGATIONS: GENERAL OVERVIEW

The sample of post-contractual clauses gathered by the Working Groupis large (several dozens of clauses) as well as diversified. We shall attemptto create an overview and to propose a certain classification, illustratingeach case. These examples are clearly not exhaustive, since there is a greatvariety of post-contractual obligations. However, the obligations describedbelow seemed to us to occur particularly frequently and to be eminentlycharacteristic.

The aim of the present chapter is to attempt to arrive at an overview ofthe problems common to post-contractual obligations. We will therefore

" On this point, seein:fra, pp. 612-614.

Post-Contractual Obligations • 599

not dwell on each type of clause, whatever its specific interest. We coulddevote whole reports to confidentiality clauses, to undertakings not to compete or to clauses that govern what is to be done with stock remaining atthe end of a contract, but that is not the purpose of this study. 4 The readermust therefore excuse the cursory way in which each individual clause istreated. The objective here is to offer a few thoughts of a global nature onthis assortment of clauses.

The clauses are classified into two principal categories, those thatmerely organize the winding up of the past, and those that make arrangements for an extension of the contract into the future.

A. Winding Up of the Past

In the first series of examples, the obligations in question are designedmerely to wind up the situation that the contract had created.

The concept of "winding up" is borrowed from company law. Duringits existence, a company engenders a set of complex relationships that donot automatically disappear when the company is dissolved. It is necessaryto arrange its final settlement. That problem does not arise generally inrelation to contracts that are performed instantaneously, where everythingis accomplished when the parties have each provided performance; eachparty takes away what it has received from the other, and that is the end ofthe matter.S The situation is different for long-term contracts, that are veryfrequent in international trade. Such contracts create and prolong betweenthe parties a relationship of collaboration which confers very clear company law aspects upon them. When they have terminated, such contractsoften leave behind a situation which must be wound up.

1. Fate of Remaining Stock

At the expiry of a distribution contract, one party may find itself in possession of stocks of the product. What is to be done with them?

It is sometimes stipulated that the producer reserves the right to buyback this stock:

"Upon termination of this agreement by expiration or otherwise ...X shall have the right, as its option, to notify distributor withinthirty days after the effective date of such termination that it will

4 Confidentiality clauses are analyzed as such in Chapter 5.

5 Problems of winding up arise nonetheless, even in contracts with instantaneousperformance, when the agreement is to be annulled or terminated, given the retroactive effect of these mechanisms under certain legal systems.


repurchase the entire inventory, or any part thereof, of the products then in possession or under the control of distributor....Distributor shall make available for collection by X within thirtydays after the giving of such notice the products specified in suchnotice and X shall pay distributor the net price previously paid bydistributor to X for such products."

The following clause, which obliges the producer to re-purchase thestock, is more favorable to the distributor:

"In the event of cancellation or termination of this agreement,the Company shall purchase or cause to be purchased all unsoldstocks or Company products from the distributor and representative at the delivered costs to the distributor and representativeat its warehouse."

Another solution is to allow the distributor to continue to sell the stockshimself for a fixed period, any remaining stock then being bought back bythe manufacturer:

"Upon termination of this agreement, X shall have a period ofninety (90) days from the effective date of termination to attemptto sell within the territory any equipment (including spare andreplacement parts and accessories) in its stock or possession. Atthe expiration of such ninety (90) days period, Yagrees to repurchase from X X's remaining stock of equipment (including spareand replacement parts and accessories purchased from Y) in goodcondition and at X's actual cost therefor (works, Y factory)."

2. Fate of a Data Bank

A publisher makes a data bank available to a user, who registers thedata. How is one to organize the fate of such data after termination of thecontract by the publisher? The following clause gives an example of a possible arrangement:

"En cas de resiliation du contrat par l'editeur, X pourra continuer aexploiter les donnees enregistrees moyennant Ie paiement,durant une periode de cinq ans, de l'indemnite de consultationprevue a l'article 5. Passe ce delai, X pourra poursuivre la diffusion des donnees dont il disposait au moment de la resiliation,sans etre redevable envers l'editeur de l'indemnite de consultation precitee."


3. Return of Documents

For the performance of a contract for the transfer of technology, theseller may have provided the buyer with various documents: plans, guides,manuals etc. Their return is often provided for at the end of the contract:

"... B shall upon termination of this agreement cease to have theaforementioned rights in the ... technology and shall be obligedto return all manual documents and drawings supplied by A hereunder and all copies thereof."

The following clause also provides for the return of various documents,which were provided, in this case, in the context of a distribution agreement:

"In case of this agreement being terminated, X shall immediately(but subject to article 14(4) and at its expense) return to Y or handover to its duly authorised representative all technical informativematerial and other sales promotional material, such as a pricebooks, that have been supplied by Y X shall have no obligation atany time to hand over or reveal to Y its correspondence with customers or customer lists."

Here is a standard clause drawn up by Organisme de Liaison des Industries Metallliques Europeennes (Orgalime):

"Les documents et materiels dont la liste figure dans les annexesI et II sont, de convention expresse, consideres comme restant lapropriete du Concedant. A l'expiration du Contrat, Ie Licenciedevra restituer tous les plans, documents et outillages rec;us dansl'etat ou ils se trouveront et sans en garder de reproduction."6

4. Return of Advertising Materials

A distributor is often entrusted with advertising materials relating tothe product that forms the subject matter of the contract. Their return (orsometimes their destruction) may be stipulated:

• "Distributor covenants and agrees that it will, at its own cost, removeimmediately from its place of business, and destroy or surrenderto X all signs, boxes and advertising materials which make anymention of or reference to ... or any of the ... or specifically byname any of the products."

Ii Orgalime, Model International Contract for the transfer of technology, ED/EEA version,June, 1997 and International Technology Ijcense Agreement Outside Ul;JHHA, September 1999,Art. 28.3-Variant B.


• "A la fin du contrat,le concessionnaire est tenu de restituer au fabricant tous les moyens de publicite et autres documents vises auchapitre III article 13, mis asa disposition et qui se trouvent en sapossession. "

5. Effects of Outstanding Orders

When a distribution agreement ends, what will be the effect of orderstransmitted by the distributor before the expiry of the agreement?

The first problem is establishing whether these orders are to be filled.In this connection, here is a very radical clause:

"Upon termination X shall have no obligation to deliver, and distributor shall have no obligation to accept any products which arethe subject of unfulfilled orders of distributor accepted by Xbefore such termination."

The other option is more common:

"The company further agrees to fulfil any orders placed on thedistributor and representative and remaining outstanding at thedate when cancellation or termination becomes effective and willindemnify the distributor and representative in respect of anyclaims arising out of a failure to fulfil such orders."

Another problem relating to orders still outstanding at the rupture ofthe contract is that of the agent's right to commission payments once thoseorders are fulfilled. The two following clauses cover that delicate question:

• "Les commandes qui auront ete transmises par l'Agent avant l'expiration du contrat et qui aboutiront a la conclusion d'une venteau plus tard ... semaines/mois apres cette date ouvriront droit ala commission prevue a l'article 18."7

• "Toutes les affaires en cours, mais non encore conclues a la dated'effet de la resiliation du lien contractue! ayant fait l'objet d'uneremise d'offre anterieure, donneront droit au profit du representant, dans les conditions de l'article 5.6 ci-dessus et dans les limitesde l'offre remise, aune commission egale a50% de son taux normal, a condition que la commande correspondante soit definitivement acquise al'entreprise dans les six mois de la date d'effetde la resiliation du lien contractue!."

7 Orgalime, Agency Conlnu;l-Inlernalional Agency on an Exclusive Basis, February1990, reprint with amendments,june 1999, Art. 31 A.


6. Risk of "Posteriority" and Insurance

In liability insurance where the trigger event (in general, fault on thepart of the insured) and the claim of the injured third party may be separated by a greater or lesser time lapse, certain policies may extend coverbeyond their term, to include subsequent claims, as long as they are theconsequence of trigger events that occurred during the currency of thecontract. Here is an example, taken from an insurance policy designed forlawyers' professional civil liability cover:

"Article 5. La garantie s'applique aux reclamations formulees,meme apres l'expiration du contrat, sur base des faits generateursde responsibilite survenus pendant la periode de validite de lapolice. Pour autant que de besoin, il est precise que la garantiepasse aux heritiers et ayants droit."

The risk of "posteriority" is a matter that has caused considerable legaldevelopments in certain countries, such as France,s Belgium9 and Spain. lO

In certain sectors, where claims may appear many years after the triggerevent (e.g., medical, pharmaceutical or environmental liabilities), insurersattempt to exclude coverage of such post-contractual claims, with so-called"claims-made clauses":

"La garantie est limitee aux reclamations introduites pendant laduree du contrat, resultant de faits generateurs survenus pendantla meme periode."

Claims-made clauses intend to discharge insurers from all post-contractualliabilities. In the countries mentioned above, they have been condemned or restricted by courts or legislation.

7. Effects on Work in Progress

When a contract for construction terminates prematurely, the fate ofthe works in progress must be settled. The problem is extremely vast, withregard to, inter alia, the applicable law and the reason for the terminationof the contract (breach on the part of the construction company, forcemajeur/!, unilateral decision of the prime contractor, etc.). Here is an example of a contractual provision governing that problem, in a sub-contract:

8 Cf. G. Viney, La clause dite de "reclamation de la victime" en assurances deresponsabilites,.Jur. Class. Per., 1994, Doctr., No. 3778.

\I Cf. M. Fontaine, Dmit des assurances, 2nd ed., 1996, pp. 303-309.

10 Cf. A. Martinez Alvarez-Baron, Spain's Claims-Made Crisis, Int.]. of Ins. I~aw., 1994,pp.316-319.


"Contractor may, at its option, terminate sub-contract at any timein whole or in part by written notice thereof to sub-contractorwhether or not sub-contractor is in default and whether or notmain contract is subject to termination. Upon receipt of any suchnotice, sub-contractor shall, unless the notice directs otherwise,immediately discontinue works on the date and to the extent specified in the notice; place no further orders or sub-contracts formaterials, equipment, services or facilities except as may be necessary for completion of such portion of the work as is not discontinued; promptly make every reasonable effort to proceed withcancellation upon terms satisfactory to contractor of all orders,sub-contracts and rental agreements to the extent they relate tothe performance of work discontinued and shall thereafter do onlysuch work as may be necessary to preserve and protect work alreadyin progress and to protect materials, plant and equipment at theproject site or in transit thereto."

The fate of work in progress is clearly not the only question to be settled in the case of premature termination of a construction contract. Otherclauses frequently cover the fate of remuneration owed to the constructioncompany, and the problem of compensation that one or the other of theparties may be liable to pay.

B. Extension Into the Future

The first group of clauses discussed above, covering situations wherethe contract has been wound up, survive it insofar as they continue to applyonce the contract has come to an end. However they do not, strictly speaking, extend the contract. They lay down the final settlement of relationsbetween the parties to achieve, as quickly as possible, a situation in whichthey are no longer bound to each other.

Other clauses purport to maintain certain contractual obligations intothe future. The aim here is, in fact, an arrangement ensuring the lastingsurvival of certain legally binding links after the principal obligations havecome to an end. Sometimes the obligations in question existed already andare extended into the future; in other cases, on the contrary, the obligations are new ones that only begin to go into effect when, essentially, thecontract has ended.

As mentioned, the objective here is not to examine each clause initself, but to present as broad a selection as possible of the various post-contractual clauses, in order to ascertain what problems they share.


1. Agreements Not to Compete

Many contracts impose, on one or the other party, a covenant to restrainfrom various forms of competition with the other party.

Thus, in the case of a sale of an undertaking or of the goodwill ofa business,the seller generally undertakes not to compete with his buyer. The obligation is stipulated for a specified duration. It therefore survives the sales contract that was performed immediately upon delivery and payment of thepurchase price. Here is an illustration:

"Le vendeur s'interdit Ie droit de tenir, creer, s'interesser directement ou indirectement, aun fonds de commerce de meme natureque celui vendu ce jour, en Europe, a peine de dommages etinterets envers l'acheteur et ce, pendant une duree de cinq ans."

A contract for the sale ofgoods, on the other hand, would not normallyrequire the inclusion of a covenant in restraint of competition on the partof the seller. The Group found an example of one, however, in a casewhere the product sold had been manufactured by the seller in accordancewith the buyer's specifications:

"The seller undertakes that, for a period of five (5) years from andafter the date of this agreement, he will not engage in any mannerin a business competitive with the ... business."

In a contract for the transfer of technology, the supplier often undertakes,for the duration of the contract, not to compete himself with the transferee; it is rare for such a commitment to survive the contract. As regardsthe assignee, the expiry of the contract normally terminates the authorization to use the process, which is confirmed in the following clause, expressing a post-contractual obligation not to do so:

"A l'expiration anticipee, normale ou prorogee du present contrat,Ie preneur s'interdit de continuer afaire usage du processus technologique communique ou de laisser continuer cette activite pardes tiers."ll

But the opposite solution may be stipulated:

"Le Licencie pourra, a l'expiration du Contrat, continuer afabriquer les Produits Licencies et autiliser la Technologie Licenciee

11 Clause cited byJ.M. Deleuze, Le contrat international de tTansfert de technologie, Paris,4th ed., 1988, p. 198.


portee a sa connaissance par Ie Concedant, sans avoir a payerd'autres redevances."12

Distribution agreements are a favorite field for covenants in restraint ofcompetition. The intermediary often undertakes not to compete for theduration of the contract itself, but that obligation often extends beyondthe term:

"The representative agrees that he will not directly or indirectlyrepresent for the purpose of sales or solicitation of sales or for anyother purpose a concern which makes or sells equipment or products similar to that produced by the company and that he will notin any manner compete directly or indirectly with the companyunless special written consent has been given by the company, andthat he will not solicit orders or take orders for a competitor of thecompany for a period of ninety (90) days following the termination or cancellation of this contract, and that for a period of ninety(90) days following the termination or cancellation of this contracthe shall refrain from competing with the company or offering salesleads to other manufacturers, sales representatives or sales agencies of similar equipment and products of the company on anyactive sales prospect under way at the time of the representative'sdeparture from employment as a representative of the company."

2. Duties of Confidentiality

For the performance of, or during the performance of, many differenttypes of contract (contracts of employment, distribution agreements, subcontracts, research contracts, contracts for the transfer of technology, etc.),confidential information is shared by the parties. The contracting party,which originally held that information, is often careful to prohibit theother party from divulging the information to third parties. Such a duty,which is originally provided for during the currency of the contract, isalmost always expressly extended in time.

Here are four examples that have been taken from various contracts:

A contract of employment:

"The executive shall not, either during the continuance of hisemployment hereunder, except as required in the performance ofhis duties, or after termination thereof, for whatever reason, disclose, publish or communicate to any person, firm or corporation:

12 Orgalime, 1\10del International Contract for the transfer of technology, ED/EEA version,June, 1997 and International technology license agreement outside UlUHHA, September, 1999,Art. 28.3-Variant A.


"(i) any trade or business secrets or confidential information of thecompany or the affiliate or their clients, or of any affiliate of thecompany or their respective personnel;

"(ii) any information received or obtained in relation to the affairsof the company or the affiliate or their clients, or of any affiliate ofthe company, or their respective personnel;

"(iii) the working of any process or invention which is now or mayin the future be carried on or used by the company or the affiliateor the clients, or any affiliate of the company or which the executive may make or discover why employed hereunder."

A sub-contract:

"10. Sub-contractor's confidentiality

"Sub-contractor agrees that he shall not, without the priory writtenconsent of contractor, disclose or make available to any person,other than contractor, or use, directly or indirectly, except for theperformance and implementation of the sub-contract, any information acquired from contractor or its subsidiaries or affiliate, orfrom any other source in connection with the performance of thesub-contract ... The obligations contained in this Article shall continue notwithstanding the completion of the Project or termination of the Sub-contract."

A sales contract:

"Dans la mesure OU I' acheteur et Ie vendeur, au cours de larealisation du contrat, ont connaissance de resultats technicoscientifiques, de secrets d'enterprise, de prix, de procedes de production, de brevets, entre autres, des entreprises concernees de lapartie adverse ou si des documentations techniques leur sontremises par ces entreprises, ils sont alors tenus au secret. Ceci estegalement valable apres la resiliation du contrat."

A rt:sean:h contract:

"Les parties s'engagent agarder strictement confidentielles toutesles informations communiquees par l'autre partie et tous les resultats obtenus du travail de collaboration de ce contrat.

"Cet engagement de secret ne s'applique pas a:

"l-ce qui est deja en possession de chaque partie au moment del'accord;


"2-ce qui est maintenant de connaissance publique ou quidevient ensuite de connaissance publique a travers les voies d'information ordinaires.

"La clause de discretion survit pendant cinq annees al'echeancede ce contrat."

It should be pointed out that the fourth example is the only one to fixa time limit for the duty of confidentiality.

Confidentiality undertakings are specifically examined in anotherchapter of this book. 13

3. Guarantee Obligations

Guarantee obligations owed by certain contracting parties may often beclassified as post-contractual obligations. Their effects are felt after the essential obligations have been performed, for example, after delivery of thegoods by the vendor or after the builder has finished the construction work.

Such obligations are, in general, governed by the applicable law itself,and the contractual clauses relating to them are usually designed to modify normal legal solutions in order to render them more or less stringent,or in some cases, better adapted to the objectives sought by the contracting parties.

Examples are extremely numerous and well known. We will merely citesome particularly interesting clauses.

The following is an example showing how a guarantee obligation onthe part of the vendor or the builder is often coupled with a commitmentto stock spare parts for a sufficiently long period of time, and, in some circumstances, even skilled staff:

• "Unless the principal shall have made reasonable alternativearrangements for supply of spare parts to customers the principalshall for a period of ten years after notice of termination use allreasonable means to supply all orders from the distributor forspare parts up to quantities needed for the products sold by thedistributor prior to the termination of this agreement providedthat if this agreement is terminated in accordance with sub-clauses(ii), (iii) or (iv) of clause 7 (a) the principal shall not be obligedto supply such spare parts to the distributor but may supply themdirectly to such persons as may be in possession of the products."

13 See SLlfJTfL, Chapter 5.


• "AI final del periodo de garantfa, X se compromete con relaci6n aYa mantener en Mexico personal capacitado durante los diez anossiguientes para corregir los defectos del equipo que Y no pudieracorregir. Los gastos correspondientes se facturaran en las condiciones vigentes a esa fecha."Durante un lapso de diez a_os X se compromete a conservardisponibles ya sea las refacciones originales 0 sus equivalentes paracubrir las necesidades de mantenimiento de Yy/o su cliente."

• "Seller shall assign one (1) qualified service representative at buyer'smain base of operation or other location as buyer may direct. Suchassignment shall commence approximately one (1) month priorto the month specified in this agreement for delivery of buyer'sfirst aircraft hereunder and continue for its least one (1) year afterthe delivery of buyer's last aircraft hereunder."

Certain contracts require the guarantor to take out appropriate insurance to cover what he has undertaken to do:

"La societe etant egalement responsable de la securite des constructions, s'engage a contracter les assurances necessaires couvrant sa responsibilite a l'egard du client pendant 10 ans apartirde la reception provisoire des batiments."

A guarantee against legal problems is frequently inserted into certaincontracts, especially in case of intellectual property disputes. The object isoften to assign the cost of legal defense proceedings to one or another ofthe parties:

"16.1 Le preneur de commande declare qu'il n'a aucun droit depropriete industrielle faisant obstacle al'exploitation du four conformement aux termes de ce contrat, et en particulier, qu'aucundroit de tiers ne peut entraver la vente mondiale des produits fabriques par l'installation.

"16.2 Si endeans un deIai de 10 ans apres la reception du four, ilse revele qu'une violation de ce droit existe, Ie preneur de commande est oblige d'entreprendre immediatement, a ses propresfrais et apres accord prealable de ... , les dispositions pour remplir son obligation aux termes du §16.1."

An agreement between shareholders provides for different settlements.It is based on various representations and warranties that have been given.The following clause causes such representations and warranties to surviveperformance of the agreement:


"The Shareholders agree that all representations and warrantiescontained in this Agreement ... shall survive the execution anddelivery of this Agreement and the consummation of the transactions contemplated hereby, regardless of any investigation made bythe Shareholders or their independent accountants or legal representatives:

"(i) with the exception of the representations and warranties setforth in SECTION 7.2(a) (i), for a period of three (3) years following the day of Execution;

"(ii) with respect to the representations and warranties set forth inSECTION 7.2(a) (ii), for a period of ten (10) years following theday of Execution;

4. Communication of Improvements and Refinements

Contracts for the transfer of technology sometimes permit the buyerto continue to use information transmitted after the contract has expired.We gave an earlier illustration of this. 14 But the parties sometimes stipulatea post-contractual obligation to communicate to each other improvementsand refinements that they develop during the exploitation of the process:

"Les parties se communiquent reciproquement a titre informatifet gratuit, pendant une periode de 5 ans apartir de la receptionde l'installation objet du present contrat, toutes les innovations,ameliorations, perfectionnements et informations techniques supplementaires qui seront en leur possession et dont elles ont la libredisposition concernant Ie fonctionnement et l'exploitation de l'installation objet du present contrat, ainsi que Ie procede de fabrication utilise."

5. Fidelity, Exclusivity, First Refusal

The extinction of the contract marks the end of a period of collaboration between the parties. It is sometimes stipulated that if, in the future,one of the contracting parties should come to make a new agreement ofthis type, that party should do so with the original contracting party, or, atthe very least, give that party first refusal.

Here are two examples that have already been quoted in a previouschapter: 15

11 See supra, p. 605-606.

15 See SLlfJTfL, Chapter 10.


• "Dans tous les cas Oll. B exportera du pays X vers Ie pays Z, desvehicules B et/ou des pieces de vehicules B fabriquees par B, envertu des presentes, B ... devra proposer d'abord la vente desvehicules B et des pieces de vehicules B ala firme C ou telle autresociete qui aurait Ie droit d'agir comme distributeur des produitsA dans Ie pays Z."Si B et C, ou cette autre societe, n'etaient pas d'accord sur l'ensemble des conditions et modalites d'un contrat de distribution, Baurait alors la liberte de proposer un tel contrat a toute autre personne, entreprise ou societe, acondition cependant que B ne propose pas par la suite acette personne, entreprise ou societe, desclauses ou conditions plus favorables que celles offertes a C, outoute autre societe, qui aurait Ie droit d'agir comme distributeurdes produits A dans les pays Z ..."

• "Au cas ml. la societe emettrait plus tard d'autres emprunts enSuisse, elle donnerait aux banques un droit de preference, aconditions egales, pour la prise ferme de ces emprunts."

III. POST-CONTRACTUAL OBLIGATIONS: COMMON PROBLEMS

The above examples serve to demonstrate how frequently clauses governing post-contractual obligations are used and how diverse such clausescan be. A contract is rarely extinguished completely as a result of the performance of its main object, the expiry of a term or for any other reason.The parties often remain bound by certain residual obligations, either towind up their contractual history, or, more characteristically, to prolonginto the future certain obligations.

A number of such clauses, as we have seen, would benefit from individual, in-depth analysis. However, that is not our purpose. Our objectivehere is to attempt to uncover some of the problems common to post-contractual obligations.

The subject had scarcely been considered in the past. Mr. Le Stanc'sinteresting study on post-contractual liability, published as early as 1978should be mentioned. Hi The author makes a distinction between the survival of the contract, where certain obligations are prolonged beyond theapparent term of the agreement, and where other obligations take effect,

16 ChI'. Le StanCo Existe-t-il une responsabilite postcontractuelle? .fur. Cl. Ph·., ed.conl/m. et ind., 1978, No. 12735. See also Ch. Del Marmol, Reflexions sur l'utilisation destechniques contractuelles dans la vie des affaires. Journ. Trib. (Belgium), 1973, p. 72. Sincethe first publication of this study, the matter has been dealt with by, among others, G.Carle, Les obligations postcontractuelles, in Lafin flu conlral,jeune Barreau de Bruxelles,(ed.), 1993, pp. 257-285, and analyzed in a systematic way byJ.M. Mousseron, TechniqLlecontractuelle, Paris, 2nd ed., 1999, No. 1785-1818.


and the memory of the contract, where the conditions governing liabilityin tort are affected by the prior existence of a contract between the parties concerned (for example, the assessment of whether there has beenunfair competition between an employee and his employer, aside fromany covenant in restraint of competition). It is mainly considerationsrelating to the survival of the contract that coincide with the subject matter of this chapter.

The discussions of the Working Group highlighted a series of questionsarising out of the phenomenon of post-contractual obligations. Do suchobligations exist in the absence of an express clause? What are the bestways to state such obligations in the contract? Are clauses prolonging certain effects of the contract always lawful? What are the penalties in cases ofnon-performance? Does maintaining certain specific obligations entail theparallel survival of certain general clauses of the contract? How long dosuch post-contractual obligations subsist, especially in cases where there hasbeen a change in circumstances? These are the questions that will belooked at one by one.

A. Express Clauses and Implicit Obligations

The title of this report intentionally refers to post-contractual obligations and not post-contractual clauses. Although the study has been principally based on clauses taken from actual contracts, the subject needs tobe considered in a broader context. Some of the clauses examined createobligations that would not exist without those clauses. Often, however, thestipulations of the contract merely govern, in accordance with the wishesof the parties, rights and obligations that already existed implicitly.

Indeed, the phenomenon of post-contractual obligations is notunknown to legal systems, even if legal theory has hardly acknowledged itsexistence.

In certain cases, the law itself determines these obligations. Most legalsystems make specific provision to cover a seller's guarantee against defective goods, or a manufacturer or construction company's guarantee withrespect to defects in construction. 17 Various legal systems, likewise, lay downconfidentiality obligations. IS And in such cases, they outlive the contractaside from any express provision.

Sometimes the law is silent on the point but case law establishes thesurvival of certain obligations on various bases, such as a broad interpreta-

17 See for example Articles 1641 to 1649, 1792 and 2270 of the Code Napoleon.

18 See for example Article 321a of the Swiss Code of Obligations, in relation to theemployment contracts.


tion of a guarantee obligation, or the principle that contracts should beperformed in good faith. Here, for example, we would refer the readerto French case law relating to the return of stocks on expiry of a concession contract19 or a German decision that holds that an erstwhile landlordwas under the obligation to forward the post of his former tenant, afterthe lease had expired. 20 Likewise, under English law, the case law makesit unlawful for the vendor of a business to canvass former customers or touse its old business name, even in the absence of any express clause tothat effect. 21

An interesting case was submitted to the Cour du Travail in Liege. Anemployer brought proceedings against a former employee for an act ofunfair competition carried out after expiry of the contract, in absence of anexpress covenant. The act still had to constitute a breach of contract for theemployment tribunal to have jurisdiction. This was the tribunal's opinion:

"... si certains griefs reproches (au defendeur) ont ete commisapres la cessation du contrat, la contestation soulevee reste neanmoins relative aun contrat de travail; Ie fait que la relation contractuelle doit etre la cause directe du litige, n'empeche que lacompetence s'etende meme ades litiges posterieurs ala cessationde la relation contractuelle mais qui, comme en l'occurrence ou ils'agit d'une action en responsibilite contractuelle du travailleur, ensontla suite necessaire (A. Fettweiss, La competence, Larcier, 1971,no.34, p.202); ... la cessation d'un contrat de travail n'entrainepas la disparition de toutes les obligations contractuelles; ... survivent, meme apres la rupture des relations contractuelles, certaines obligations accessoires, telles les obligations de fidelite etd'execution de bonne foi dont la violation engage la responsibilite contractuelle de ceux aqui elles incombent."22

Where certain post-contractual obligations are governed by statute orrecognized by the courts, express clauses have the advantage of substituting the parties' chosen solutions for those of the ordinary law. Theproblem of lawfulness, which we shall discuss later, is a separate one. Butthe preceding reflections give rise to our first piece of advice for negotiators. The post-contractual aspects, which may need an express provision, should be examined carefully in the light of the applicable regime,in accordance with the law of the contract in the absence of any clause.

19 See Chr. Le Stanc, op. cit., No. 32, and the references cited.

20 R.G.Z. 161,338.

21 Labouchere v. Dawson (1872), L.R. 13 Eq. 322. For the case of a former employer'strade secrets, see Faccenda v. Fowler, The Tintes, November 16, 1983.

22 Cour Trav. Liege, October 27, 1983, unreported.


In order to be fully effective, a contractual provision governing an obligation must be based on a thorough knowledge of the ordinary law fromwhich it derogates.

B. Specific Clauses, Enumeration or General Formula?

Clauses quoted above deal with specific obligations: undertakings relatedto stocks, work in progress, restraint of competition, confidentiality, warranties, etc. This case-by-case approach can lead to contracts containingscattered clauses providing for post-contractual obligations.

Negotiators are sometimes aware of the phenomenon as a whole. Theymay then choose to deal with it in a single provision. A first method is toresort to an enumeration of obligations meant to survive the contract. Hereare two examples:

• "Art. 40.7. Survival. All rights and obligations of the Contract withthe exception of GC 5.3., 7.6. (b), 9.11., 9.12., 13.6., 23.2c), 25.13.,25.14., 32, 34.3., 35.4., 36, 37, 39 and 40 and SC 4 (hereinafter the"surviving provisions" . .. ) and without prejudice to the right to settle any dispute in accordance with all the provisions of theContract in the frame of GC 36, shall expire upon the end of theDefects Liability Period ... or earlier in case of termination of theContract, unless provided otherwise in the Contract."

• "It is expressly understood and agreed that the rights and obligations under Sections 3, 4, 5, 7, 8, 9, 11 and 15 hereof, shall surviveany termination of this Agreement, except that in the event of termination pursuant to Subsection 12.3, the rights of the breachingor defaulting party shall not survive such termination."

The positive drafting of the latter clause is certainly preferable to therather confused negative approach of the former. The reader will alsonotice that the survival of certain rights has a unilateral character in thesecond clause, to the detriment of the party whose default caused the contract to be terminated.

The danger of any enumeration is the risk of omission. Anotherapproach is to resort to a general formula. This is attempted by the following clause:

"Notwithstanding any termination or expiration of this Agreement,it is agreed that those rights and obligations, limitation of liabilities and release from liability, which by their nature are intendedto survive, shall survive and accrued rights of action under any provision shall not be prejudiced."


The problem is now that such a formula can lead to immense difficulties of interpretation. What are the obligations the "nature" of which is tosurvive the contract? Some answers may come to the mind, but many ofthose obligations will be open to debate.

A compromise solution could be to combine a general formula with anenumeration of examples. The above clause already referred to limitationof liability provisions. The following one is somewhat more explicit:

"Cancellation, expiration or earlier termination of this Agreementshall not relieve Parties of obligations that by their nature shouldsurvive such cancellation, expiration or earlier termination, including, without limitation, warranties, remedies, promises of indemnity and confidentiality."

The method still appears to be risky, due to the lack of precise terminology in the enumeration.

The marked particularity of post-contractual obligations, which maycall for rather elaborate specific provisions, suggests prudence with regardto any attempts to bundle them.

C. Problems of Lawfulness

Specific problems of lawfulness arise when certain clauses define postcontractual obligations. Such clauses are clearly invalid when they areintended to derogate from binding legislation or are against public policy.They may also contravene certain general principles.

In most legal systems, covenants in restraint of competition are validonly if they have certain geographical and temporal limitations. 23 There isa risk of breaching the principle of freedom to pursue a trade.

Restrictions on freedom of contract under competition law in the fieldof technology transfer contracts also arise. Certain contractual obligationsare lawful only during the period of validity of the intellectual propertyrights to which they refer. The contract cannot provide for covenants goingbeyond that time period; if they do, the obligation becomes unlawfu1. 24

23 See for example, Y Serra, La non-r:oru;urreru;e en matiere r:ornrnen:iale, sociale et civile,Paris, 1991, 337 pp.; H. De Page, Trade elimentaire de dmit civil belge, II, No. 91; comparefor English law, Cheshire, Fifoot & Furmston's loaw oj Contract, 13rd ed., 1996, pp.411-439.

24 See the Regulation ofJanuary 31, 1996 of the Commission on the application ofArticle 85(3) of the Treaty to certain categories of patent licensing agreements, morespecially Art. 1,2° (OJ.E.G, L. 31/2, February 9,1996).


D. Penalties

What penalties attach to non-performance of clauses laying down postcontractual obligations?

If nothing has been expressly provided, the party to whom the obligations are owed does not have very many remedies. There are naturally thevarious remedies of specific performance or damages that may be availableunder the applicable law. However, if the contract has essentially been performed, the mechanism of contractual liability is partially dismantled andcertain defenses may no longer be available. The right to withhold performance, for example, is no longer available if the contracting party allegingthe breach is itself no longer bound by corresponding obligations, and thisis often the case.2:"i Termination of the contract for non-performance,where this is in the discretion of the court (see Article 1184 of the FrenchCivil Code), may be refused if it is requested merely in respect of a breachof a post-contractual obligation, where the main object of the contract hasbeen correctly performed.26

It is prudent therefore, when drafting such a clause, to considerwhether it is possible to provide for stronger sanctions, for example, anappropriate penalty clause. 27 Negotiators too rarely give consideration tothis; the very great majority of the clauses examined by the group did notstipulate any specific penalty.

E. Parallel Survival of the General Clauses of the Contract?

Where the contract is essentially at an end but the parties remainbound by a post-contractual clause, perhaps a guarantee obligation or acovenant of confidentiality. Does that clause truly remain isolated? Do certain general clauses of the contract not also survive?

Let us suppose that the contract provided that disputes were to be settled by arbitration, or that the courts with jurisdiction to hear any disputeswere those of a certain town, or that the applicable law should be Frenchlaw or that a detailed clause was to provide what action to take in respect

25 vVhere that right may be exercised, it is likely to be of very little use. Thus, if theseller of a machine fails in its obligation to provide the promised spare parts, the buyerwill not be obliged to pay for them; but the inadequacy of this remedy is all too obvious.

26 In some cases, penalties of a different nature may be considered. Thus, the revelation of manufacturing secrets by a former employee may constitute a criminal offense(see for example Article 309 of the Belgian Criminal Code). Sometimes, it is possible toapply to the courts for an order for penalty payments ("astreinte"), where allowed underthe applicable law.

27 On penalty clauses, see SLI!JTCl, Chapter 6.


of the consequences of a force majeure event or hardship. Do such provisionslose all effect once the contract has essentially been performed? Or, on thecontrary, may they still be invoked in cases of difficulty with the performance of any "post-contractual" obligations?

At this point, no doubt, the drafting of these clauses would be scrutinized. The way in which they were worded may disclose a certain degree ofgenerality sufficient for them to apply to all obligations arising from thecontract, whensoever they were to be performed. Difficulties may nonetheless occur if those drafting these clauses did not bear in mind situationswhere post-contractual obligations arise: the re-balancing of the positionsof the parties provided for by a hardship clause, for example, is meaningless if the upheaval in circumstances henceforth affects only a unilateralobligation.

In exceptional cases, the Working Group encountered stipulationsexpressly providing for the survival of certain general clauses. Thus, an arbitration clause finished with the following provision:

"10.c. Cette clause survie ala resolution du contrat dans la mesureou il y a matiere qu'on puisse deferer al'arbitrage."

That specification is a useful one. However, it creates the risk of a contrary inference being drawn as to other general clauses that do not containthe same specific point.

The issue is covered by three international instruments, regarding termination of the contract.

Article 81,1 0 of the Vienna Convention of International Sales ofGoods provides that "Avoidance does not affect any provision of the contract for the settlement of disputes or any other provision of the contractgoverning the rights and obligations of the parties consequent upon theavoidance of the contract." Such latter type of provisions may include certain clauses concerning consequences of non-performance, such as liquidated damages and exemption clauses, subject to verifying theirapplication in case of termination. 28

According to Article 7.3.5, 3 0 of the Unidroit Principles on International Commercial Contracts, "Termination does not effect any provisionof the contract for the settlement of disputes or any other term of the contract which is to operate even after termination." The commentary to thisprovision gives an example: a confidentiality undertaking concerning infor-

2S Cf. D. Tallon, Effects of Avoidance, in CJ. Bianca & MJ. BonelI, Cornrnentary on theInternational Sales loaw, 1987, pp. 603-604.


mation needed to produce machinery. An analogous provision appears inArticle 9.305 (2) of the Principles of European Contract Law.

Similarly, the new Chinese law on contracts, of March 15, 1999, provides that termination of the rights and obligations arising out of a contractdoes not affect clauses concerning dispute resolution (Article 98). An analogous rule is expressed about confidentiality undertakings, among others(Article 92).

F. Duration and Change in Circumstances

(a) Although various obligations survive the contract, that survival isnot eternal.

The obligations relating to liquidation of the past are often to be performed immediately. Documents and advertising materials, for example,must be returned without delay. Sometimes, however, a short time limit isprovided, and we have seen illustrations of this in cases of sale, or re-purchase of stocks and where the right to commission payments on earlierorders subsist temporarily.

The problem is very different where obligations, which extend the contract into the future, are concerned. By definition, these obligations are fora certain duration. But what should that duration be?

Most often, a time period is provided. Sometimes this affects the verylawfulness of the clause: we have seen this in relation to covenants not tocompete, and also in clauses providing a right to intellectual property fora limited period. We have also seen express time limits in clauses coveringguarantee obligations, in particular in relation to spare parts and the retention of specialized personnel.

In other cases, however, the drafters of clauses do not, on purpose orotherwise, lay down any time period. We have found examples in several ofthe confidentiality clauses cited above, as well as in examples of clauses offirst refusal. What is then the duration of these undertakings? Sometimes,an answer is found in the law itself. Thus, Article 2596 of the Italian CivilCode provides a limit of five years maximum for covenants not to compete.In other cases, the case law maintains that the obligation must exist for a"reasonable" time. Otherwise, reference must be made to principles thatmay be formulated within the applicable law as to undertakings for anunspecified time period. These undertakings may, inter- alia, be coupledwith the option of unilateral termination. 29 But that solution, designed for

29 See, in French law,]. Ghestin, Chr.Jamin & M. Billiau, Traite de droit civil, Les e[!etsdu r:ontrat, Paris, 2nd ed., 1994, pp. 278-279.


contracts of indeterminate length, is not always suitable for post-contractual obligations: it is difficult to conceive of unilateral termination of anobligation of confidentiality.

(b) When a clause survives the contract until some far off date or for anindeterminate period, what would be the effect of a change in the circumstances out of which it arose? An obligation, which is thus prolonged on thecoat-tails of a contract, seems particularly vulnerable to such changes.

For example, a covenant not to compete binds a former contractingparty for five years. During that period, the enterprise to whom the obligation is owed disappears from the market. Must the party owing the obligation still comply? The problem is a delicate one because the party towhom the obligation is owed does not disappear legally at the time whenthe business closes its doors. As a natural person, the party to whom theobligation is owed survives with its rights and, in time, transmits them to itssuccessors. As a legal person, the business survives for the period of itswinding up and its rights may be passed on to another firm. That does notdetract from the fact that if the economic activity ceases to be carried out,the obligation not to compete no longer makes sense. Here, we run intothe difficult problem of how hardship is dealt with in the different legal systems. 3D At the time of drafting the clause, it would, of course, be possibleto provide for the covenant not to compete to lapse when the enterprise towhom the obligation is owed ceases all relevant activities.

Analogous problems can arise with other obligations and other changesof circumstances. For example, what would be the fate of a confidentialityobligation if the secret, which it protected, entered the public domain?Must an obligation of first refusal always be abided by if the business towhom the obligation is owed comes under the control of a competinggroup?

(c) One other situation deserves mention. A contract stipulates thatvarious obligations are to survive it. Before arriving at its normal term, however, the contract gives rise to a dispute between the parties, at the end ofwhich the contract is terminated. Does that termination extinguish theobligations that should have survived? In certain cases, the question may beof consequence. Before termination, the parties may, for example, havecommunicated confidential information to each other, and the secrecyclause still serves a purpose, even if the contract has ended without havingbeen correctly performed. 3 \ A wise advocate would ask the court to findthat termination had not extinguished such covenants. The solution could,

30 See supra, Chapter 9, and the references quoted in note 1.

31 Analogous problems arise when a contract is annulled.


however, depend on the circumstances: it would be difficult to conceive ofthe survival of a covenant not to compete that benefited the party responsible for the breach.

IV. CONCLUSION

Post-contractual obligations constitute too disparate a group to allow amuch more detailed survey, but they deserve to be highlighted. They enableto re-consider "downstream" and modify received wisdom regarding thelength of contracts in the same way as the study of letters of intent openedre-consideration of this problem "upstream." The few preceding reflectionsshould also draw the attention of negotiators of contracts to a certain number of difficulties that are likely to be encountered, and that may be overcome or reduced by appropriate drafting of the relevant clauses.

FINAL OBSERVATIONS

Thirteen aspects of the law and practice of international contracts havebeen presented; they certainly do not exhaust the matter. Many otherclauses would deserve to be examined. In each chapter, the analyses andsyntheses, which followed the descriptive parts, could be developed in considerably more detail.

Enough has been said, however, to reach certain conclusions. On theone hand, studying the practice of international contracts can greatly contribute to the general theory of contracts. On the other hand, the work ofthe Group permits us to reveal and stress significant characteristics of suchpractice.

I. A RICHER AND MORE DYNAMIC VIEW OF CONTRACTS

As seen in the light of actual practice, the reality of contract is muchricher and much more dynamic than the image given by traditional presentations.

A. Enrichment of Traditional Legal Analysis

In the first place, the study of international contracts considerably enrichestraditional legal analysis.

At the stage of contract formation, the review of letters of intentrevealed the existence of a vast set of problems previously ignored by thetheory of pre-contractual negotiations. As soon as negotiations reach someamplitude, the parties often feel the need to organize their various aspectsinto a series of agreements (venue and frequency of meetings, compositionof the delegations, working language, allocation of costs, exclusivity, confidentiality, etc.). Once the discussions have started, the gradually attainedresults are registered in successive documents, which become more andmore elaborate; such documents should not be confused with the futurecontract, but they may bind the parties not to re-open discussions on pointsalready agreed upon, and to continue negotiations in good faith.

The existence of recitals is not unknown in the common law, where ithas generated some case law, but they are practically unheard of in civiliantheory of contracts. However, it appears that a large proportion of contracts-the majority of international contracts-begins with recitals where

621


the parties make a series of statements. The legal effect of such preliminarystatements cannot be underestimated; at the least, recitals may playa decisive part in interpreting the contract. But they may also affect the rules concerning reality of consent, the determination of the basis of the contract,the intensity of the respective commitments, the role of pre-contractualdocuments or the links with other contracts, and sometimes they may, bythemselves, create fully effective obligations.

As to the interpretation of international contracts, the practice revealsthat the parties do not refer only to the principles and traditions of theapplicable law, but that they also add ingenious and sometimes controversial solutions. Thus, for reasons of contract management and evidence, aclear tendency is apparent towards some formalization of internationalcontractual practice. Examples are provided by definitions, titles and entireagreement clauses. Still, when the contract is executed, some clauses aimat protecting the formal document against the risk of oral modifications orlater conduct that would be contrary to the written stipulations. NOM (nooral modification) and non-renunciation clauses are expressions of thisdevelopment. In all cases, drafters of international contracts are motivatedby the concern to minimize uncertainties resulting from the applicable lawand the interpretation by the judge or arbitrator. In this matter, freedomof contract serves not only to determine the contents of the parties' rightsand obligations, but also their scope.

Legal systems have often paid attention to the fact that a certain contractual obligation may be binding in various degrees. French law, forinstance, distinguishes between obligations de moyens and obligations de resultat. This matter catches the attention of drafters of international contracts,who resort to different expressions with variable content to characterize theparties' obligations: to exert one's best efforts, act with all due diligence, perform with reasonable care or in conformity with industry standards. Apartfrom the delicate problems of interpretation caused by such formulae,their analysis invites reflection on the notion of contractual obligation, theintensity of which depends on the nature of the commitments undertakenby the parties.

Confidentiality clauses offer a perfect example of the level of sophistication careful negotiating can reach. The most elaborate clauses take greatcare to describe the object of confidentiality, the types of information thatcan be excepted, the persons with whom the information may be shared,the intensity of the obligation, the precautionary measures to be taken, theduration of the undertaking and the remedies in case of breach. Analyzingsuch clauses gives the opportunity to consider confidentiality obligationsthat already arise from the applicable law, delicate aspects linked to thetransmission of secret information to third parties, the illegality of certain

Final Observations • 623

confidentiality undertakings, the conflicts that may arise between confidentiality clauses and the obligation to provide information before courts.There is some skepticism concerning the efficacy of confidentiality clauses;a secret can never be absolutely preserved, but a well-drafted clause willreduce the risks to a significant degree.

Liquidated damages clauses are well known in traditional presentations, although their legal status varies in comparative law. The main discussions concern clauses providing for excessive amounts; such clauses maythen be avoided or reduced, depending on the legal system. Practice, however, reveals that liquidated damages are often stipulated at the obligor'sinitiative, in order to use such clauses to limit liability; this considerationcasts a very different light on the clauses. On the other hand, the analysisof contractual documents gives evidence to the impressive degree of elaboration such clauses may attain: listing of penalties specific to each type ofobligation, grace periods and provisions for amnesty, progressive penaltyschemes, combination with other mechanisms to induce a higher qualityof performance, combination with other remedies, etc.

Clauses limiting liability or exempting from liability are classic as well,but here, too, the study of the practice of international contracts reveals different new aspects. Fresh light is shed on the very notion of clauses limiting liability upon discovering the multiple ways practitioners manage todecrease the scope of their undertakings and liabilities: not only the traditional maximum amounts, but also the limitation of liability to cases offraud and gross negligence, the softening of the intensity of obligations, theextension of causes of exoneration, the shifting of the burden of proof, thelimitation of the time allowed and the imposition of particular formalitiesin order to file a claim, the exclusion of certain types of damages, especiallyof indirect and unforeseeable damages, the exclusion ofjoint and severalobligations, the restriction of a warranty to reimbursement, replacement orrepair of goods, etc. The analysis of such clauses also reveals the richnessof the linking mechanisms with liability insurance coverage.

The impossibility of performing a contractual obligation does not leadto the same consequences in all legal systems; many are unfamiliar with thenotion of fone majeur/!, well established in French law among others. Yet,force majeure clauses are traditional in international contracts. Practitioners,however, have come up with a very elaborate stipulation, replete with original characteristics. The very notion of fora majeur/! is often attenuated inits requirements, and the effects follow a different orientation from theclassical theory. The suspensive effect is prominent, while the extinctiveeffect is not. The occurrence of the event constituting fora majeur/! in itselfcan be the cause of new obligations: notification to the other party, providing evidence, efforts to overcome the obstacle, possible obligation to renegotiate the contract after a certain time.


The study of hardship clauses causes French and Belgian lawyers toremember that their respective legal systems are rather isolated on theinternational stage, when they reject the so-called theorie de l'imprfoision. Butthis analysis of practice also finds that the solutions offered by most otherlegal systems in case of fundamental change of circumstances are not satisfactory for practitioners. Rather than letting a judge assess the situationand, in certain cases, terminate the contract, practitioners prefer to set upa re-negotiation procedure, put in place by well-drafted clauses. The mostdelicate problem is that of the possible intervention of a third party shouldthe parties fail to agree; the great importance of that problem is graduallybeing acknowledged.

"English," most-favored customer and first refusal clauses shed a lighton certain contemporary techniques of adapting contracts to marketchanges and of "fidelizing" a partner for a possible future operation. Theyalso reveal the inventiveness of drafters when elaborating contractualclauses, and they again demonstrate the importance of the role a thirdparty may play in the life of a contract, this time acting as the "independentcontroller" to whom one resorts sometimes in order to compare competing terms.

Assignment clauses do not only demonstrate the intuitu personae character of many international contracts; they also ensure the control of theother party's identity. They reveal the nature of the contract, and preventthat the assignment of the contract or of certain rights be subject to theassessment of a tribunal. The sophistication of such clauses enables partiesto fully regulate the assignment in advance, and to determine its conditions, terms and effects. The fact that many assignment clauses provide foran exception to interdictions and restrictions in favor of assignments toaffiliated companies seems to reveal that groups of companies are subjectto a specific law of a private nature.

Clauses relating to the termination of international contracts cover awide variety of situations and causes that bring the contract, or some of theobligations deriving from it, to an end. They include, on the one hand,clauses that specify the ways of implementing and the effects of mecllanisms known in domestic legal systems (e.g. requirements of advancenotice), and, on the other hand, provisions that attempt to specifY somenotion of variable content (such as that of contractual "fault"). In thisrespect, there is a noted tendency to make the events leading to termination of the contract more objective through their enumeration, thus largelyeliminating the need for judicial interpretation.

Finally, the analysis of obligations surviving the contract was the occasion to point out another phenomenon ignored by the classical presenta-


tions of contract law. Mter the main obligations have been performed, acontractual relationship often persists between parties, not only to ensurethat the contract is wound up, but also to prolong it in the future, in different ways: non-competition clauses, confidentiality undertakings, warranties, exclusivity clauses, etc. In itself, this reality is worthy of attention; italso reveals a series of particular problems, concerning, for instance, thevalidity of some clauses, the remedies still available, the possible parallelsurvival of the general clauses of the contract, the duration of post-contractual obligations and the effect of a change of circumstances.

B. Contracts in a Dynamic Perspective

The concrete approach of the international contracts practice alsoinvites re-consideration of the general theory of contracts in a much moredynamic perspective.

Traditional presentations are divided into two main parts, devotedrespectively to the formation and performance of the contract. In its studyof contract formation, modern legal science has been especially concernedwith determining the precise moment when the contract was concluded,or, more precisely, the moment when an offer can be considered accepted.The theory of contracts concluded at a distance (or generally the theory ofdeclaration of wills inter absentes) is the most significant evidence of this concern for utmost accuracy in determining the moment the contract comesinto existence. When the contract is concluded, it has to be performed.Legal developments are concerned with the various aspects of performance(contents and scope of obligations, good faith performance, place andtime of performance, etc), as well as with the types of non-performanceand the remedies available. Termination of the contract, as such, is rarelythe subject of specific developments, since the problems involved are dealtwith in the general framework of the study of the extinction of obligations.A contract normally comes to an end with the arrival of its termination dateor when satisfactory performance of the obligations has taken place. It mayalso expire under other circumstances that do not correspond to its economic purpose: avoidance for initial imperfection, premature terminationfor breach or for impossibility of performance, etc. In all such cases, legaltheory is concerned with the precise definition of the moment when thecontract comes to an end: arrival of the termination date, day of the event,the declaration or the judgment causing termination, in some casesretroactivity of the extinction back to the date of conclusion, etc.

This is a brief reminder demonstrating that principles are present, withcertain variations, in most legal systems, according to which a contract isconsidered to exist between precise temporal limits: from one certainmoment until another certain moment.


Such an approach is understandable, since contract is a source of obligations and both the obligee and the obligor need to know when their rightsand obligations start and when they are extinguished. A potential obligorowes nothing to the obligee before the contract is concluded. A formerobligor does not owe anything any more after the contract has expired.

Reality, however, proves to be less categorical. Legal analysis had alreadyintroduced some shades of grey in the above presentation. However, thestudy of international contracts shows that a good many contracts, far frombeing precisely located between two temporal landmarks, have the characteristics of on-going processes with variable contents. Undertakings of a contractual nature may appear before the actual formation of the contract;formation and performance are not necessarily successive phases; after ithas been performed, a contract often survives through various obligations.

(a) Before the formation of a contract, classical theory, with variationsamong the different legal systems, has often come to acknowledge cases ofpre-contractual liability deriving from abusive disruption of negotiations,and it has also recognized the notion of promise of contract under its different forms. However, such developments remain relatively marginal compared to the results of our study of letters of intent, which has revealed thefrequency of different types of contractual agreements preceding the conclusion of the final contract: planning of all aspects of the negotiations,agreements on the results already achieved and on the further proceedings. Arguments have surfaced in support of the idea that a contract cancome into existence gradually, not instantaneously.

(b) Some of these pre-contractual documents create an extraordinarysituation in comparison with classical theory: in some cases, parties agree tostart performing the contract before the negotiations are complete, i.e.,before the contract is concluded. The two traditional phases of formationand performance are no longer distinct. How can one analyze such a situation? Such decision can be considered as amounting to a specific type ofagreement, which separates part of the future contract into a distinct earliercontract covering a more limited agenda, to which the parties already consent. However, it is also possible to see the relationship between this situationand the above considerations as to the moment of contract formation: thepoint of no-return having been reached, the parties consider that the contract is concluded even though the negotiations are not yet completed, andit is normal for performance to begin. The former analysis can be better reconciled more easily with the classical theory of contract formation, but is itnot somewhat artificial, and should not the latter be preferred?

Once the contract is concluded, it has not always necessarily emergedfrom its phase of formation. The analysis of the practice of international


contracts shows the frequency with which parties resume their negotiationsto complete or modify the contract during its existence.

A long-term contract is often re-negotiated in the course of its duration. An agreement to be performed over a long period of time is clearlyvery vulnerable to changes of circumstances, and some of the initial clausesmay become inadequate. While some provisions call for automatic adaptation (e.g., indexation clauses), others provide for re-negotiation. Bestknown are hardship clauses, applicable in cases of fundamental changes incircumstances. Force majeure clauses also provide for re-negotiation procedures when the obstacle to performance persists for too long, and the suspension of obligations is no longer bearable. Re-negotiation of the contractcan also happen with competing offer and most-favored customer clauses.

Such cases of contract re-negotiation appeared not only in our analyses; other studies have also pointed to the problem of gaps in a contract.Complex agreements so frequently found in contemporary practice cannotprovide for everything. Gaps may sometimes result from involuntary omissions, which are understandable owing to the wide range of problems to besolved. But they may also be intentional, if the parties have decided to postpone the determination of certain elements of the contract, owing to theirdifficulty coupled with the parties' impatience to conclude the agreement.The contract may then provide for a clause dealing with gaps, organizingfurther negotiations on the points still pending and possibly the intervention of third parties (experts, arbitrators) in case the parties fail to agree.Here again, the classical theory might hesitate to recognize a so-called "contract" several clauses of which remain to be negotiated, but which the parties consider as concluded and begin to perform.

Even apart from the circumstances that have been described, performance of a complex contract may lead the parties to wish to introduceoccasional amendments to their initial agreement. Certain contracts evenprovide for the setting of a permanent contract management committee,assigned to the task of making the necessary amendments to the originalcontract.

In all the above cases, the contract is subject to an occasional or a regular process of re-negotiation. The conclusion of the agreement did notbring the formation phase to an end. Formation continues throughout thelife of the contract.

(c) Finally, the study of practice reveals that the contract does notalways come to an end at a definite moment, as the classical theory generally states. In many cases, the contract survives through several obligationsthat will continue to bind the parties, or one of them, for a certain period.


It may be earlier obligations extending into the future, or new obligationsarising out of the termination of the contract. The contract has come to anend only with regard to its main object; it stays alive through various accessory, but still very important obligations. Certain general clauses of the contract must also survive, in order to provide the post-contractual obligationswith the necessary framework.

If such obligations survive, it is, of course, on the basis of the contractitself, and it is not really accurate to speak of post-contractual obligations.This reveals the insufficient approach of traditional analysis, which alwaysplaces the termination of the contract at a definite historical moment. Inmany cases, termination of the contract occurs in two stages: first, termination of the main obligations, which can happen at a precise date, andthen, termination of the surviving obligations, which can occur in a progressive manner over a relatively long period of time.

The "life" of a contract is not always inscribed between two precisedates when the contract is concluded and when it is terminated. The"birth" of a contract, as well as its "death," often take place in processes ofcertain durations, not in the form of punctual events. The study of thepractice of international contracts consequently invites to a dynamic conception of contract law.

II. TRENDS IN INTERNATIONAL CONTRACT LAW PRACTICE

The analysis of so many contract clauses permits to draw some generalconclusions as to several important features of international contract practice.

A. Developments in International Contract Law Practice

First, the preparation of this book was an occasion to re-examine certain contract practices after a hiatus of many years, the first report on hardship clauses having been written some 25 years ago. This raises the questionwhether contract practices have changed much over the past decades.

As it turns out the changes are neither revolutionary nor substantial.Of course, some clauses changed more than others. For instance, the termmemorandum of understanding (MOD) is used much more frequently inprecontractual relations than it was in 1977 when the original report on letters of intent was published.

Much more important changes have been noted in the economic activities and branches of trade where international contracts are used. To a significant extent, international contracts have moved from big industrialprojects, such as construction and engineering contracts, towards complexfinancial and corporate transactions such as project finance or reorganiza-


tions and mergers and acqUIsItIOns. Technological developments haveexpanded business branches, such as information technology and telecommunications, creating new applications for existing contract clauses andtechniques. International contract practice follows technological and economic changes.

B. Features of International Contract Law Practice

What are the features of international contract drafting, as those may beinferred from the publications of the Working Group? One might summarize these features along four lines: (1) international contract drafting practice to a certain extent is autonomous with regard to domestic law; (2)international contract practice leads to a certain standardization of contractclauses; (3) international contract drafting is law developed by practitionersresponding to practical problems and needs; and (4) international contractdrafting is increasingly influenced by Anglo-American drafting techniques

1. International Contract Drafting: The Paradox of Autonomy

As of the 1960s, the theory of lex mercatoria has been developed in France(primarily by Professor Goldman) and in Belgium by Professor Del Marmo!.With regard to contract clauses and techniques, this theory emphasizes thatthe repetitive use of clauses leads to a spontaneous new law outside theboundaries of domestic law and is being enforced by arbitral awards.

The scope of this book does not permit elaborating on the nature andefficacy of the lex mercatoria.! Only two issues need to be mentioned in thecontext of these conclusions: (a) does international contract drafting practice confirm that international contracts refuse or are reluctant to be integrated into a given domestic law setting? and (b) what are the objectives ofcontract drafters who choose rules other than domestic law rules.

(a) The first question incited vivid debates during the meetings of theWorking Group.2 A majority of members were opposed or at least reluctantto admit that international contract drafting is developing outside domestic legal systems. This position applied to best efforts clauses, penalty andliquidated damages clauses, exemption clauses and hardship clauses. 3 Ofcourse, there are exceptions such as State contracts where contract negotiations do not lead to a choice of domestic law, and where a compromise

1 See F. De Ly, International Business Law and Lex Mercatoria, Amsterdam, NorthHolland, 1992,361 pp.; F. De Ly, Lex Mercatoria (New Law Merchant): Globalizationand International Self-Regulation, 14 Diritto del commercio internazionale, 2000, No.3, pp.555-590.

2 See sU!Jr(J" pp. 448-449 and 491-492.

3 See supra, Chapters 4, 6, 7 and 9.


is found by referring to general principles of law or principles common tothe legal systems of the parties. These exceptions seem to confirm the rulethat general practice refers to domestic law. Thus, international contractpractice appears to debunk the hypothesis that international contract drafting practice is autonomous from domestic legal systems.

However, international contract drafting may be characterized as autonomous in relation to domestic law to the extent that practitioners developnew solutions or techniques within the limits set by domestic law. In thisrespect, reference may first be made to matters parties may freely disposeof. Contract law being, by and large, non-mandatory, there are no objections that practitioners use freedom of contract to create new rules.Furthermore, in international contracts, parties may use the conflict principle of party autonomy to choose a law that is favorable to the objectivesthey pursue and avoid a legal system frustrating these objectives. This ruleis, however, subject to any international mandatory rules (lois d 'applicationimmediate) applicable before a judge or arbitrator. Finally, there are also situations where parties may localize their contract within a jurisdiction withliberal rules in order to avoid contract rules of a less liberal country.Financial contracts on the international capital markets in London or NewYork are examples. Thus, also in contract law, there may be regulatory competition between different jurisdictions that may be used to advantage byinternational contract drafters.

(b) Autonomy in international contract drafting may be driven by different objectives. Extensive and elaborate contract drafting may be aimedat filling gaps in the domestic law applicable to the contract or to interpretthe scope of any domestic law rule. Hardship clauses, severability clauses orextension and renewal clauses4 may be cited as examples of clauses thatserve these functions. In those cases, the parties intend to complement theuncertainties of domestic law with contractually enforceable provisions.

Secondly, the parties may have an interest in derogating from domestic law. To the extent that there is freedom of contract or party autonomy,any such derogation establishes that contract law rules of the applicable lawdo not correspond to the wishes or interests of the parties or to theirrespective bargaining positions and power.s

Finally, from a psychological and business management perspective,international contract drafting shows a desire for self-regulation and self-

4 See supra, Chapers 9 and 12 and B. Kohl, Les clauses de prolongation et de renouveHement, I.B.I~j., 2002, pp. 443-460.

5 See U. Draetta, Les clauses de force majeure et de hardship dans les contratsinternationaux, I.B.LJ, 2002, pp. 347-358.


management on the part of businessmen and legal practitioners. The parties want to retain control over their contract and, consequently, dealextensively with contract formation, entry into force, contents, termination and dispute settlement. This idea is clearly behind confidentialityclauses that are inspired by a desire to control the flow of confidentialinformation.G

This feature affirms the fact that the parties know, or are deemed toknow, better the details of their business dealings and are therefore in abetter position to make decisions regarding the birth, life and death oftheir contract. On the other hand, it expresses a reluctance-often legitimate-that third parties such as judges, arbitrators, experts or others interfere in their business relationship while the parties may still be able to solvethe issues or problems at hand.

The following developments reflect the new directions that have beennoted in the previous chapters:

1. The increasing use of contractual procedures that determine theconditions under which contract clauses are to be triggered anddealt with (contractual processualization);7

2. The increasing use of contractual documents that formalize theabove-mentioned contractual procedures (contractual formalizationor documentalization) as, for instance, with regard to recitals andentire agreement clauses;8 and

3. The increasing use of objective standards of conduct to avoid escalation of disputes (contractual objectivation) as has been noted in theanalyses of the Working Group regarding best efforts clauses9 anddeadlock and divorce clauses injoint venture contracts. lO

These new developments are gradually transforming the role of contract negotiators and drafters from legal technicians to managers of contract formation, performance, termination and dispute settlement.

6 See M. Btihler, les clauses de confidentialite dans les contrats internationaux,I.B.LJ, 2002, pp. 359-387.

7 See supra, Chapters 8, pp. 418-435 (jorce majeure clauses) and Chapter 9, pp.476-486 (hardship clauses).

8 See supra Chapters 2 and 3, pp. 129-150 as well as A. Farnsworth, L'interpretationdes contracts internationaux et la pratique des preambules, I.B.LJ, 2002, pp. 271-279.

9 See supra, Chapter 4 as well as Ch. Chappuis, Les clauses de best efforts, de reasonable care et de due dilgence et les regles de l'art dans les contrats internationaux,I.B.LJ, 2002, pp. 281-301.

10 See F. De Ly, Divorce Clauses in International Joint Venture Contracts, I.H.loj.,1995, pp. 279-315.


The conclusion so far is that international contract drafting is characterized by a great deal of autonomy at different levels but still, to a largeextent, anchored in a supporting domestic legal system. If this conclusionwere correct, then international contract drafting would not be completelyautonomous from domestic law but would have created a paradoxicalautonomy.

This perspective of international contract drafters is not without someambiguity. On the one hand, they prefer their contract to be inserted intodomestic law through a choice of domestic law clause. On the other hand,international commercial arbitration remains, by and large, the preferredmethod of dispute setdement. International commercial arbitration has, however, been liberalized to a certain extent from domestic law, which creates tensions between the applicable law and the denationalization of arbitration. ll

2. International Contract Drafting: Standardized Law?

Contract clauses may be copied from one contract to another. Thisprocess has been facilitated with the massive introduction some 20 yearsago of word processing software. More recendy, optical reading devices andthe Internet have contributed to easy reproduction of texts. Has international contract drafting thus become standardized law using boilerplateclauses,12 or has it remained, by and large, a practice based on tailor-madecontracts drafted for each situation?

There is no clear-cut answer to this question, since some clauses arefound in most contracts (e.g., some interpretation clauses such as entireagreement clauses, no oral modification clauses, language clauses, nonwaiver clauses, severability clauses as well as assignment clauses, choice oflaw clauses, arbitration clauses) showing a lot of uniformity. But even inthese clauses, there are differences related to the specific facts of the caseor the respective bargaining positions of the parties. Also, an increasingdegree of sophistication is used in the drafting of these clauses, especiallyin arbitration clauses. The general conclusion is that even for theseclauses, international contract drafting-notwithstanding some uniformity-may not be reduced to boilerplate and that standardization hasonly taken place to a certain extent. In any event, international contract

11 In this respect, one may refer to situations where the parties could not agree onthe law applicable to their contract and either did not insert a choice of law provisionsor made a reference to principles of international trade law. Furthermore, the composition of the arbitral tribunal may be such that only a minority of its members haveexpert knowledge of the applicable law. Finally, psychological or other reasons mayexplain why the arbitral award hardly ever refers to the applicable law.

12 See, for instance, R. Chistou, Boilerplate: Practical Clauses, London, Financial TimesLaw & Tax, 2nd ed., 1995,226 pp.


drafting is not standardized law. This conclusion does not only hold truefor individually negotiated contracts (on off contracts) but even for generalconditions that pursue standardization objectives from the user's perspective but are generally not aimed at standardization involving theentire branch of trade concerned. 13

On the other hand, there are contract clauses and techniques (e.g., letters of intent, recitals, penalty and liquidated damages clauses, exemptionclauses,I4 termination clauses, confidentiality clauses, post-contractualobligations clauses) that are so intimately related to the fundamental obligations of the parties and form the hard core of the contract, that they arespecifically negotiated and where scant uniformity is present. For theseclauses, there is no standardized law and these clauses cannot be characterized as boilerplate. Consequently, international contract drafting hardlycontributes to the formation of spontaneous law in the sense that specificand concrete rules might be derived from these clauses. However, this doesnot exclude that more abstract principles may be formulated on the basisof international drafting practice. For instance, the analysis offorce majeur-eclauses has indicated that practice has developed a rule of suspension ofcontract performance in case of temporary events offorce majeure. IS

The nature of boilerplate clauses has sometimes been addressed during the discussions of the Working Group in the context of formulatingmodel clauses. I6 The Group generally has been reluctant to formulatemodel clauses and has never embarked on such a project. Contrary toother organizations such as ICC, FIDIC, ECE, CNUDCI or the International Center for Commerce (UNCTADjWTO) that have publishedmodel clauses, the Group has limited its work to the collection, analysis andassessment of clauses. Formulating model clauses has not been undertaken because of the diversity of factual elements and specific intereststhat are mostly at stake in the contracts that were researched. These reservations are, to a large extent, legitimate, but one may wonder whether forthe first category of clauses mentioned above, different model clausesmight not be suggested. For the second category of clauses discussed inthe previous paragraph, one should perhaps at least consider draftingappropriate checklists.

13 Exception to be made for commodities markets where product homogeneityleads to standardization of contract rules.

14 See J. Rajski, Les clauses limitatives et exoneratoires de responsabilite dans lescontrats internationaux, I.B.LJ., 2002, pp. 321-328.

15 See supra, Chapter 8, pp. 424-428.

16 See sU!Jr(J" note 2.


By way of conclusion, one may say that there is no standardized law ofinternational contracts and that divergence (rather than uniformity) is therule. This implies, in practice, that each international contract may requiresufficient attention as far as negotiation and drafting are concerned andthat contract provisions are to be checked against the law applicable to thecontract.

3. International Contract Drafting: Practitioners' Law?!7

Practitioners draft international contracts corresponding to the interests they represent and to the needs of the transaction involved. This is truefor force majeure and hardship clauses where contract drafters have soughtsolutions in order to avoid that contracts are terminated by the mere occurrence of an event of force majeure or that contracts are to be performed asagreed even when circumstances have drastically changed. This practitioners' law develops along two lines: (a) the solution of practical problemsencountered in daily business life; and (b) the perspective of the privateinterests that the drafter is representing.

(a) In solving practical problems, drafters engage in a creative processthat unfolds along non-structured lines, in sometimes chaotic fashion, andis not inspired by dogmatic conceptions. In this respect, an analogy can bemade with the way lawyers and judges work, argue and reason in commonlaw jurisdictions. Contrary to the civil law tradition, the drafting process isnot guided by pre-established notions and principles but by formulatingconcrete and pragmatic rules aimed at solving the problems at hand.Similarly to the distinction between scholarly opinion and case law in somecivil law countries, international contract practice notes the differencebetween contract law as it is taught at the law schools and contract law inaction in the practice of international contract drafting. Hardship clausesare, for instance, the answer developed, in practice, to the strict rules ofcontract law regarding supervening changes in circumstances in countriessuch as France, Belgium and England. Letters of intent aim at solving problems regarding extensive negotiations and pre-contractual liability not dealtwith in many jurisdictions. IS

These different forms of contractual engineering contribute to the formation of new legal principles that are essential to know as well as understand the mechanics of international contracts. The spontaneous andgradual nature of these rules has the disadvantage of opacity. It is regrettable that scant efforts are made to increase transparency notwithstanding

17 See G. Langenfeld, Vertragsgestaltung: Methode, Verfahren, Vertragstypen, Munich,Beck, 2nd ed., 1997, 197 pp.

IS See supra, Chapter 1 as well as J. Schmidt-Szalewski, Les lettres d'intention dansla pratique internationale, I.B.LJ, 2002, pp. 257-270.


its manifest importance in practice. The added value of the activities andreports of the Working Group may precisely be that they contribute totransparency and analysis of international contract drafting practice. Onthe other hand, the creative work of practitioners in the process of drafting international contracts does not intend to create new legal rules of ageneral nature but rather to address concrete problems. The frequent presence of contract clauses, in practice, does not have quasi-legislative ambitions but may have indirect effects to the extent that judges and, moreimportantly, arbitrators may take these into account by means of openended standards of adjudication of the applicable law (e.g., good faith andfair dealing or best efforts) or through conflict of laws methods (e.g., conflict rules the arbitrators deem appropriate or the better law approach).

The importance of the creative processes of international contractdrafting practice also has relevance for contract law teaching and research.It is regrettable that contract drafting courses are, by and large, absentfrom law school curricula and that scant books are available on the subject. I9 National legislatures, domestic courts and international conventionshardly take drafting practice into account. For instance, the Convention onthe International Sale of Goods (CISG) is primarily based on traditionalnotions of offer and acceptance and does not address issues of pre-contractualliability. Neither does it tackle sales concluded in the context offramework contracts nor long-term supply contracts where issues of hardship may arise. Fortunately, Principles such as the Unidroit Principles andthe Principles of European Contract Law (Lando Commission) 20 have paidmore attention to contract practice, namely to entire agreement clauses(Unidroit, Article 2.1.17; PECL, Article 2:105).

(b) The second issue regarding the role of practitioners in creatingnew contractual clauses and developing new contractual techniques concerns the legitimacy of these efforts. This issue is related to the autonomyquestion discussed in Section II.B.1: the formal legitimacy of this law-mak-

19 Most books refer to domestic contracts, see J-M. Mousseron, Technique contractuelle,Paris, Francis Lefebvre, 2nd ed., 1999, 792 pp.; R. Christou, Drafling Cormnen:ialAgreernents, London, Sweet & Maxwell, 2nd ed., 1998,749 pp. For international contracts,one may cite some works that are aimed at practitioners (Lmny Contrats Internationaux H.Lesguillons (ed.) 7 Vols., Joly Contrats Internationaux V. Heuze (ed.) 7 Vols. InternationalBusiness Transadions, D. Campbell (ed.) 3 Vols., The Hague, Kluwer Law International,A.H. Kritzer, International Contrad Manual, The Hague, Kluwer Law International,Mtinchener Vertragshandbuch, Torne 3/2, Internationales Wirtschajtsrecht, Munich, Beck,1997,1303 pp.); F. Bortolotti, Diritto dei contratti intemazionali, Padova, Cedam, 1998,673pp.; M. Bianchi, I contratti intemazionali, Milan, II sale 24 are, 3 Vols., 1998-1999, 181,313 and 261 pp.

20 Unidmit Principles on International Cormnerrial Contracts, Rome, Unidroit, 2004;Principles ofHuropean Contract loa11l, Parts I and II, Commission of European Contract Law,O. Lando, & H. Beale (eds.), The Hague, Kluwer Law International, 2000, 561 pp.


ing process is found in freedom of contract and party autonomy to theextent that these are recognized in the law applicable to the contract.

By way of conclusion, international contract drafting practice confirmsthe hypothesis that practitioners contribute gradually, and at different levels, to the formation of legal rules or principles that are substantive rulesof contract law enforced by judges and arbitrators within the boundariesset by the applicable domestic law.21

4. International Contract Drafting: Of Anglo-American Origin?

During the past 25 years, the Working Group has witnessed the gradually growing importance of the English language as the contract language and of Anglo-American techniques and contract drafting styles. 22

This tendency raises the question whether international contract draftinglaw and practice has not become heavily influenced by Anglo-Americanlaw and practice.23 Some see in this tendency a new stage of developmentin the lex mercatoria now dominated by Anglo-American law. Thus, the lexmercatoria would be developing not as a national law but as uniform contract law dominated by Anglo-American law and by the big English andAmerican law firms. 24

Before analyzing this question, one needs to identify the underlyingcauses of such developments. 25 First, there is the undisputed AngloAmerican economic dominance not put in question after the fall of theBerlin Wall, the shift in Central and Eastern Europe to market economiesand the demise of the Soviet Union. Also, in international economic andfinancial dealings, institutions such as the World Bank and the Inter-

21 See, in relation to penalty clauses in arbitration, B. Cremades, Les dommagesinterets conventionnels prevus en cas de rupture de contrat, les clauses penales et lesdommages-interets a caractere repressif dans les contrats internationaux, I.B.LJ, 2002,pp. 329-345.

22 Regarding anlir:i!Jalory brear:h of wnlnu;l, see M. Vanwijck-Alexandre, Les clausesmettant fin au contrat et les clause survivant a la fin du contrat, Premiere partie, I.B.LJ,2002, pp. 407-442.

23 See l/arneTicanisation du droit, 45 Arch. Phil. Dr., Paris, Dalloz, 2001, 399 pp.; W.Wiegand, The reception of American Law in Europe, Am. I Com!J. L. 1991, 229; W.Wiegand, Amerikanisienmg des Rechts, insbesondere des Bank- und Wirtschaftsrechts,in Corporations, Capital Markets and Business in the Law, Festschrijt R. Buxbaum" TheHague, Kluwer Law International, 2000, pp. 601-615.

24 M. Shapiro, Globalization of the Freedom of Contract, in The Slale and Freedom (!fContract, N. Scheiber (ed.), Stanford, Stanford University Press, 1998, pp. 268-298; S.Schuit, De onstuitbare oprnars van het Anglo-Arnerikaanse recht, Contracteren, 2001, pp.42-44.

25 Compare E.A. Farnsworth, L'amerir:anisalion (Ia dmil-Mylhes oLlrealiles, Arch. Phil.Dr., 2001, pp. 21-28.


national Monetary Fund impose liberalization measures on internationaltrade and influence economic policy in developing countries. Economicglobalization (as well as ideological, and to a certain extent, cultural) hasnot found countervailing forces in a divided Europe or in Asia. Althougheconomic globalization has not found its equivalent at the political level,where there are no global law-making institutions that would threatennational sovereignty,26 this is hardly relevant for contract law that, for commercial transactions, is, by and large, non-mandatory. Legal globalizationfor commercial transactions, thus, follows economic rather than politicalprocesses. This is especially true for the international capital markets whereuniform practices prevail. These global processes, in the absence of alternatives, are governed by Anglo-American legal rules. Even in less globalmarkets, the dominance of Anglo-American law is felt. The reasons are economic and psychological and are validated by the absence of alternatives.As to the economic benefits, standardization of international contracts inthe English language and in accordance with Anglo-American models andtechniques reduce transaction costs for companies. In addition, there arepsychological advantages. A common language and drafting style contribute to the creation of a common platform for linguistic and legal communication for practitioners coming from different jurisdictions, whoattempt to cross language and legal culture barriers. The liberalization ofthe legal profession at regional and worldwide levels has also contributedto these developments. The economic factors driving these changes andleading to more standardization based on the Anglo-American model, ofcourse, also entail disadvantages in terms of loss of linguistic, cultural andlegal diversity.

These observations have been confirmed, to a certain extent, by legalsociologists influenced by the sociological theories of Pierre Bourdieu, whoemphasizes that-primarily in international commercial arbitrationtransnational elite lawyers push legal globalization inspired by convictionand/or self-interest. 27 Their expertise gives them a competitive edge andrelegates others to a secondary role.

Whether one agrees or not with these findings, the question of AngloAmerican influence has been raised, and forces us to consider the impactof the English language and of Anglo-AInerican contract drafting modelsand techniques.

26 J. Wiener, Globalization and the Harmonization oj I~aw, London, Pinter, 1999, pp.184-198.

27 Y Dezalay & B. Garth, Dealing in Virtue, International Cormnen:ial Arbitration andthe Construction ofa Transnational Legal Order; Chicago, University of Chicago Press, 1996,343 pp.


The answer is probably not definitive. Recent economic literature suggests that there is no globalization but rather tendencies towards deregulation and economic integration limited to the triangle North America,Europe and the Far East. Furthermore, there are different levels of integration depending on the economic sectors involved. International capitalmarkets or the markets for corporate control are much more sensitive toAnglo-American standardization than less integrated markets.

The Anglo-American influence on the international contract draftingscene can further be explained by factors related to the above-mentionedstructure and approach of the common law. Maybe the common law is better at problem solving, and is thus more client and market oriented, whilethe civil law is better at conceptualization. A legal sociologist, VolkmarGessner, has asked the provocative question whether Continental Europeanlegal education is not doomed to produce global losers, since it producesgraduates incapable of solving practical legal problems. 28 ParaphrasingGessner, the shocking question arises whether lawyers from civil law jurisdictions do not risk losing the competitive battle for transborder legal services lacking the tools to provide the services clients need and that theircommon law counter-parts can offer.

From a legal perspective, this does not imply that common law solutions are superior to civilian solutions. Some common law rules are indeedsubject to criticism as noted in relation to the English approach to contractinterpretation. The literal English interpretation tradition is the exceptionin comparative law and may have practical disadvantages with its demandfor excessive detail, which is not necessary in a context where English lawis not involved.

On the other hand, one also sees common law countries develop in thedirection of more rationalization and, thus, converge with civil lawapproaches. Recently an American author has noted that "the relics of theold English common law cannot be defended either rationally or pragmatically" and advocated that in order to build "a coherent private law," effortstowards greater systematization already proposed by Blackstone and 19thcentury authors and inspired by civil law traditions, should be pursued.29

Major developments in uniform law such as CISG, the Unidroit Principlesand the PECL all have taken place in the form of codification along structured lines following the civil law codification tradition, notwithstandingnumerous common law contributions.

28 V. Gessner, Globalization and I~egal Certainty, in Hmer:g:ing I~egal Certainty: HmpiricalStudies on the Globalization of Law, V. Gessner, & A. Cem Budak (eds.), Aldershot,Dartmouth, 1998, pp. 446-447.

29 J. Gordley, The common law in the twentieth century: some unfinished business,88 Calif. I~aw Rev., 2000, pp. 1815-1875.


With some reservations and exceptions, one might say-whether onelikes or dislikes that conclusion-that the battle for the lingua franca ofinternational business transactions has been won by the English languageand the consequences are clear: a good, if not excellent, knowledge of thatlanguage is essential for international contract drafters. Legal educationand continuing legal education should adjust accordingly.

As to contract clauses and techniques, the influence of Anglo-AInerican law cannot be denied, but integration in civil law contexts must be considered cautiously. Contract drafters must check the applicable law andlook for compatibility of concepts and structures. Some inspiration maycome from the recent achievements of uniform law which bridge commonand civil law divides. Thus, alternatives may be considered and developedthat may be better suited to the needs of international commerce.

Finally, the real problem is not that one legal culture should prevail overanother, but that an open-minded approach is required to develop solutionstailored to the demands of international commerce that need not necessarily be based on any domestic legal system. Consequently, there is no need fora national, European or other answer to the Anglo-American challenge buta search for new and better solutions. The years to come may confirm the relevance of national law for drafting international commercial contracts butalso the useful and increasing development of new and workable solutionsbased on uniform law or on different national legal systems.

III. AN ON-GOING PROGRESS

Thirteen chapters have attempted to describe and analyze the draftingof international contracts in practice. Twenty-five years (1975-2000) ofmeetings and discussions of the Working Group have been summarized inthis volume. The project still continues and other subjects will follow.

The authors and the members of the Working Group hope that thisbook will contribute to a better understanding of the intricacies encountered in the practice of drafting international contracts and to the development of international contracts law.

WORKING GROUP INTERNATIONALCONTRACTS

LIST OF MEMBERS HAVING PARTICIPATEDIN THE VARIOUS PROJECTS

ALLAIN-ROUGEJ. (Paris)ALLOTTI V. (Rome)ANELLI I. (Lugano)ARENTZ-HANSEN L. (Oslo)ARZEAU (Paris)AUSTIN R.S. (Paris)

BALDINI G. (Milan)BALLARINO T. (Padova)BAPTISTA L. O. (Sao Paulo)BARC F. (Paris)BARCISZEWSKA W. (Poland)BASNAYAKE S. (Vienna)BEGUIACHVILI G. (Lyon)BELLODI L. (Bmssels)BENOIT-MOURY A. (Liege)BERGMANS B. (Louvain)BERGSTEN E. (Vienna)BEYER W. (Warsaw)BILLIOUD DE NUZILLET G.BISMUTH J.L. (Paris)BITTERJ.W. (Rotterdam)BLANCHARD P. (Paris)BOCCARA B. (Paris)BONOMI A. (Lausanne)BOON J. A. (Bmssels)BORTOLOTTI F. (Genova)BOSCHETTI O. (Milan)BOURDEAUX G. (Paris)BOURQUEJ.F. (Geneva)BROWN J.-T. (Paris)BRUNA S. (Bmssels)BURZYNSKI A. (Warsaw)

CALABI T. (Milan)CAPATINA O. (Bucharest)CAPRASSE O. (Liege)CARDIN P. (Paris)CARLE G. (Bmssels)CASTELL-BORRAS (Paris)CHAPPUIS Ch. (Geneva)CHERPILLOD Y (Lausanne)CHOQUARD M. (Zurich, California)CHOQUET F. (Paris)CIACCIA G.G. (Milan)

CLERC S. (Bmssels)CORBISIER I. (Louvain, Bmssels)COSTANTINIJ. (Paris)COSTET L. (Versailles)CREMADES B. (Madrid)CREMADESJ.A. (Paris)

DABIN L. (Liege)DAVID H. (Seraing)DE BRUIJN S. (The Hague)DE CLERCQ G. (Bmssels)DE LA VILLEON B. (Sceaux)DELEUZE J.-M. (Montpellier)DELFORGE G. (Louvain-Ia-Neuve)DEL MARMOL C. (Liege)DELVAUX P.H. (Louvain, Bmssels)DEMEYERE L (Antwerp)DEMARET P. (Liege)DE POVER M.F. (Liege)DOMANSKA A. (Poland)DOMANSKI G. (Warsaw)DONCKA. (Bmssels)DRAETTA U. (Milan)DUBISSON M. (Paris)DUBOUT H. (Brussels)DUBREUIL C. (Paris)DUBUISSON B. (Louvain)DURAND-BARTHEZ P. (Paris)

EISEMANN S. (Paris)ELLAND-GOLDSMITH M. (Paris)ELLINGTON P. (London)EL SHALAKANI A. (Zamalek)ESCUDERO CLARAMUNT J. (Barcelona)ESSENBURG WJ. (Amsterdam)ESTRELLA FARIAJ.A. (Vienna)EVRARD A. (Louvain)

FARNSWORTH E. A. (New York)FARRANTS R. (London)FAUVARQUE-COSSON B. (St. Cloud)FAVRE-BULLE X.(Geneva)FELIKS J. (Katowice)FINET F. (Bmssels)FOCCROULE D. (Liege)

641


FOX C. (Paris)FRANCON D. (Meylan)

GABRIEL P. (Liege)GANEM P.H. (Paris)GLIBERT F. (Brussels)GODEFROID A. (Brussels)GOEDMAKERS A. (Rotterdam)GOLUB M. (Washington)GONNE R. (Brussels)GREGOIRE F. (Brussels)GREVEN C. (Brussels)GROSHEIDE W. (Utrecht)GROBHANS A. (Schorndorf)GRUBERJ. (Zwikau)

HANOTIAU B. (Louvain, Brussels)HELD D. (Paris)HERBOTS J. (Leuven)HERVE L. (Liege)HIRSCH A. (Geneva)HIRSCH L. (Geneva)HJERNER L. (Stockholm)HOCHBAUMJ. (Essen)HOLLANDER P. (Brussels)HORSMANS G. (Louvain, Brussels)HUBERT A. (Brussels)HYLKEMAA. (Rotterdam)

IMHOOS C. (Geneva)IMPALLOMENI L.M. (Paris, Florence)ISAACS S. (London)

JADOUL P. (Louvain, Brussels)JILLSON R. (Brussels)JOELSON M. (Courbevoie)

KAClYNSKI W. (Poland)KAHN S. (Noordwijk)KARCENTY (Paris)KARLSHAUSEN R. (Herstal)KAUFMANN-KOHLER G. (Geneva)KOENIG (Heidelberg)KOPELMANAS L. (Geneva)KRAEMER F. (Paris)KRAFT W. (Cologne)

LAGASSEJ.-P. (Brussels)LANDO O. (Holte)LANGE D. (Tours)LARERE P. (Courbevoie)LAZARSKI H. (Paris)LE GALL J.-P. (Paris, Reims)LEIMBACH M. (Paris)LEMAIRE H. (Brussels)LEMOS (Paris)

LE PANSE A. (Puteaux)LESGUILLONS H. (Paris)LEW-MORELLE H. (Brussels)LEW-MORELLE J. (Brussels)LEW J. (London)LIETART K. (Louvain, Brussels)LONCLEJ.M. (Saint-Quentin-Yvelines)LURGER B. (Graz)

MAJOROS F. (Cologne)MALENGREAU X. (Nivelles)MALEVILLE M.-H. (Mont Siant Aignan)MALINOWSKI A. (Pologne)MALOU B. (Brussels)MANNINEN T. (Helsinki)MARC S. (Paris)MARCHANDISE Ph. (Brussels)MARINO D. (Milan)MARTIN Cl. (Brussels)MASKOW D. (Berlin)MATRAY D. (Liege)MATRAY L. (Liege)MAUCQ S. (Louvain)MAYEUR P.-Ch. (Neuilly-sur-Seine)MEAKIN I. (Geneva)MERCADAL B. (Paris)MESTRE J. (Aix-en-Provence)MEURET F. (Paris)MICHELER (Vienna)MIGNON-GILLIS M.-H.MILQUET J. (Louvain)MITROVIC D. (Belgrade)MOATTI L. (Paris)MOREAU-MARGREVE I. (Liege)MORILLOT A.-R. (Paris)MORRESI R.M. (Bologna)MUIR WATT H. (Paris)

NEDJAR D. (Paris)NELISSEN-GRADE J .-M. (Leuven)

OLLIVIER P. (Paris)

PAILLUSSEAU J. (Rennes)PAMBOUKIS H.P. (Athens)PATOCCHI P.M. (Geneva)PAULUS H. (Liege)PELLETIER R. (Paris)PELTZER P. (Brussels)PENNINGTON R. (Birmingham)PEVTCHIN G. (Brussels)PHILIPPE D. (Louvain, Brussels)PIOTROWSKI W. (Poland)POURE M. (Paris)PRADO M. (Sao Paulo)PREVISANI A. (Versailles)

QUENTIN Th. (Paris)

RAJSKIJ. (Warsaw)RAMBURE D. (Paris)REECE R. (Paris)REMICHE B. (Louvain)RETRAINT J.P. (Paris)REVACLIERJ. (Geneva)RICHTER-ECHEVARRIAJ. (Madrid)ROCA B. (Paris)ROLET S. (Brussels)ROUGERON R. (Paris)

SANDROCK F. (Diisseldorf)SANDROCK O. (Munster)SCHAMPS G. (Louvain-Ia-Neuve)SCHIAVONI G. (Milan)SCHMIDT J. (Strasbourg)SCHUBERT G. (Brussels)SCHWEND G. (Cologne)SEFTON-GREEN R. (Paris)SEKOLECJ. (Vienna)SERVAIS O. (Liege)SILVA ROMERO E. (Paris)SMIT H. (New York)SOUCHERE S. (Paris)STARKLE B. (Brussels)STRAUCH M. (Cologne)SZCZANIECKA T. (Polancl)

TARALLO J. (Paris)TAVERNE M. (Louvain)TAYLOR R. (London)TERKI N. (Alger)

List of Members • 643

THEVENOZ L. (Geneva)THILMANYJ. (Louvain)THONON D. (Brussels)TOMASZEWSKI M. (Warsaw)TROCHON J.Y (Paris)TROCHU M. (Tours)

VANDEPLAS E. (Brussels)VAN DEN HAUTE E. (Brussels)VAN LITH H. (Rotterdam)VAN MUIJDEN M.S. (Rotterdam)VAN RUYMBEKE M. (Namur)VAN UYIVANCKJ. (Brussels)VANWIJCK-ALEXANDRE M. (Liege)VERBIST H. (Brussels)VERKHOVSKOV P. (Paris)VERNIMMEN G. (Brussels)VINCKE F. (Brussels)VULLIETYJ.P. (Geneva)

WAELDE Th. (Dundee)WALSCHOT F. (Brussels)WARKALLO W. (Warsaw)WASILEWSKI T. (Warsaw)WIGGERS W. (Amsterdam)WILL M (Geneva)WISNIEWSKI A. (Warsaw)WYROBA S. (Pologne)WINNER (Vienna)WITZ Cl. (Saarbriicken)

XOUDIS S. (Geneva)

ZIVY I. (Paris)

REFERENCE TO ORIGINAL PUBLICATIONS

1. Les lettres d'intention dans la negociation des contrats internationaux,D.P.C.I., 1977, pp. 73-122

2. La pratique du preambule dans les contrats internationaux, RD.A.I./I.B.LJ., 1986, pp. 343-369

3. Interpretation Clauses in International Contracts (characterization,definition, entire agreement, headings, language, NOM-clauses, nonwaiver clauses and severability), R.D.A.I./I.B.LJ., 2000, pp. 719-812

4. "Best Efforts", "Reasonable Care", "Due Diligence" and IndustryStandards in International Agreements, R.D.A.I./I.B.LJ., 1988, pp.983-1027

5. Confidentiality Clauses in International Contracts, R.D.A.I./I.B.LJ.,1991,pp.3-94

6. Les clauses penales dans les contrats internationaux, D.P.C.I., 1982, pp.401-442

7. Les clauses limitatives et exoneratoires de responsabilite et de garantiedans les contrats internationaux, R.D.A.I./I.B.LJ., 1985, pp. 435-478

8. Les clauses de force majeure dans les contrats internationaux, D.P.C.I.,1979,pp.469-506

9. Hardship Clauses, D.P.C.I., 1976, pp. 51-8810. Les clauses de l'offre concurrente, du client Ie plus favorise et la clause

de premier refus dans les contrats internationaux, D.P.C.I., 1978, pp.185-220

11. Assignment Clauses in International Commercial Contracts, RD.A.I./I.B.LJ., 1996, pp. 799-833

12. Termination Clauses in International Contracts, RD.A.I./I.B.LJ., 1997,801-836

13. Les obligations "survivant au contrat" dans les contrats internationaux,D.P.C.I., 1984, pp. 1-27

645

INDEX

acceleration clause 575acceptance 6

unconditional acceptance 6adaptation clause 447administrative authorization 11-12affiliate

See groups of companiesagency contracts 189-190Anglo-American influence 636-639applicable law clause 540, 616-617approval Board of Directors 24, 34arbitration

third party determination 48-50,483 ff., 490-491, 524-527, 627

See also arbitration clausearbitration clause 44, 539, 616-617asset sale 538assignment clause 269-270, 537 ff.

arbitration clause 539assignment of contract 545assignment of receivables 545asymmetric clauses 547bilateral clauses 547clause authorizing assignment

549clause limiting assignment 550clause prohibiting assignment

540,549compulsory assignment 543-544,

548consequences of assignment 559contract of assignment 540delegation 546exceptions to prohibitions 554exception regarding corporate

affiliates 554

intuitu personae 541novation 546partial assignment 558private international law 540, 544subcontracts 546standardisation 537-538substitution 546symmetric clauses 547unilateral clauses 547

assignment of contractSee assignment clause

audit 358

bankruptcySee termination clauses

best efforts 207 ff.acquisitions 201agency contracts 188comfort letter 198confidentiality clause 201construction contracts 190countertrade contracts 200distribution contracts 188force majeure and hardship 203letter of credit 199licensing of trade marks and

patents 196obligation to mitigate loss 204research contracts 193sales promotion 188satellite launching 197technical assistance 194

best endeavoursSee best efforts

blocking clause 148-149buyer's credit 69

647


change of control 270, 445, 619characterization clause 121 ff.competing offer clause

See English clausecomplementary contract 12, 54condition

at will 195condition precedent 11-12condition subsequent 12-13, 27, 576confidentiality

without confidentiality clause 286confidentiality clauses

and exemption clause 285and specific contracts 234-237assignment 269-270categories of contracts 234contract stages 237copying of documents 274-276designated information 244-247duration 278exceptions 247 ff.exceptions as to persons (infor-

mation sharing) 255 ff.extension of obligation 264 ff.intensity of obligations 270judicial or administrative

proceedings 259-261, 293list 247public domain 248-250remedies 282staff 255-256, 266-269subject matter 239surviving contract 280, 606,

616-617unilateral, reciprocal or parallel

obligations 238validity 291

contract definition clause 126corruption 575

data room 146, 236, 244definitions 78-79, 153 ff.definition clause 153 ff.divisibility

See severability clausedue diligence 201, 218, 358, 361

English clauses 494 ff.automatic adaptation 498definition 494different types 502evidence of competing offers 497nature of third party

intervention 524notion 494procedure 500renegotiation 498-499termination 499third party intervention 524thresholds 501suspension 499validity as to competition law 532validity as to price determination

530entire agreement clause 117-119,

129-150and confidentiality clause 136

entry into force clauses 12-13, 34estoppel 93evergreen clause 582evidence clause 140 ff.evidence of the contract 106,

114-119exclusive remedy clause 378-380exclusivity 24-25, 39, 44-45,

610-611exemption clauses 351 ff.

and assurance 394and force majeure clauses 355and penalty clauses 308, 355assignment 380-381burden of proof 366definition 352-353damages (consequential and/or

unforeseeable) 391-394exclusion of consequential dam

ages 373exclusion ofjoint liability 373

exclusion of unforeseeabledamages 377

exclusive remedy clause 378-380extension of exemption 364limitation as to amounts 369limitation as to fraud and gross

negligence 362limitation as to specific

requirements 368limitation as to deductibles 372limitation of time 367limitation to recourse

possibilities 380limitation to reimbursement,

replacement or repair 378precontractual declarations 353private international law 389scope of contractual obligations

361surviving obligations 617thresholds 372-373validity 382

fait du Prince, intervention bygovernment 411-413, 418

financeobtaining finance 12

firs t refusal right 512 ff.comparison and control 518competing offer 512most favorite customer clause 512nature of the control by the

third party 524option 512-514procedure 522remedies 527-530Savoy clause 523surviving obligation 610-611, 619

foundations of the contract 92-93force majeure clause

adaptation clauses 447and exemption clauses 424, 445applicable law 439armed conflicts 409

Index • 649

efforts to overcome forcemajeure 428

enumeration of force majeureevents 408

enumeration: indications 408exclusions 416excuse for the debtor 424excuse for breach 445-446expression 450-451exterior event 403fait du Prince, intervention by

government 411-413, 418hardship 443impossibility to perform 405insurance and force majeure 437labor unrest 409-410lack of definition 408legislative modifications 413lex mercatoria 441liquidation 435, 447lists 408machine break-down and similar

events 410-411mitigating criteria 403natural disasters 408-409notification and evidence 418notification of end of force

majeure 429obligation to pay amount of

money 436new obligations 448procurement contracts 426project finance 445remedies 422renegotiation 447stabilisation clauses 412suspension of performance 424,

446termination 430, 447traditional definition 403transportation and supply prob-

lems 411unavoidability 403-406unforeseeability 403-406


forum selection clauses 44,616-617

four corner clauseSee entire agreement clause

framework contract 18, 33

gap filling clauses 176 ff.general conditions 148-149group of companies 250-251,

256-257,554

hardship clause 453 ff.changes 461-462circumstances 461 ff.comparative law 453, 488-489contract adaptation 476, 489dynamic view of contract law 627excluded circumstances 470force majeure 456imprevision 468-469indexation clause 457long term contract 487-488most favorite customer clause 457notification 476objective criteria 471prejudice 470-471price adjustment clause 456recitals 460-461return to normal conditions 487rights and obligations pending

renegotiation 486safeguarding clause 458stand-still period 475subjective criteria 472supply contact 455surviving obligation 617-620suspension 482termination 481third party intervention and

adaptation 483, 490-491unforeseeability 462-463unforeseeable risks 457verification of the hardship event

473

heading clause 151 ff.heads of agreement 2-3hold-harmless agreements 356, 397

imprevisionSee hardship clause

indexation clause 457-458industrial secret 231industry standards 191, 222-225,

361insolvency

See termination clausesinterpretation

arbitration 106-107comparative law 107-119evidence 106, 114-119plain meaning rule 113, 141Principles of European Contract

Law 112substantive law 106-114unequivocal and precise clauses

108Unidroit Principles 112uniform law 111-112

language clause 156 ff.leasing 380-381letter of credit 199-200letter of comfort 6-8, 198-199letter of intent 1-57

and tort law 136arbitration 10break-up fees 29case law 4,38-40,41-42comparative law 35-37contract formation stages 13-20damages 50-53definite commitments 24-30definition 2dynamic view of contract law 626exemption clause 22-23, 41, 43final contract 6-13intervention by judge or

arbitrator 48-50

letter of award 22letters without commitment

20-24recitals 17subject to contract 20-21, 41termination fees 29without being contractual 21

lex mercatoria 441, 567, 629-632liability 352liquidated damages

See penalty clausesliquidation clause 335local supply 191lock-out agreement 25long term contract 212, 487-488,

499,504,514,597

matching clauseSee English clause

meet or release clauseSee English clause

memorandum of understanding2-3

mergers and acquisitions 201, 538,609-610

merger clauseSee entire agreement clauseminimum quantity 324-325mistake and misrepresentation

91-92,146-148,353-354,388,574-576

false declaration 353-354non-disclosure 353-354non-contest clause 354BBB:arbitration clause 509comparison of conditions 504consequences for the contract 507definition 503different types 510evidence 506nature of the intervention by the

third party 524procedure 508-509third party benefit 510

Index • 651

thresholds and limits 509validity as to competition law 532validity as to price determination

530

negotiationexclusivity 24-25, 39, 44-45parallel 24secrecy 25, 39, 44-45

non-compete clause 605, 613, 615,619

non-contest clause 354non-waiver clause 150, 163 ff.and precontractualliability 136No Oral Modification clause 150,

159 ff.notice 582nullity

See termination clauses

obligation to indemnify 608-610See also hold harmless clauses

obligation to use best efforts218-222,362

obligation to inform 189

open terms contract 33option 32, 512-514option right

See firs t refusal rightorder

order letter 6successive orders 18-19

parol evidence rule 116-119partial nullity

See severability clausespenalty clause 299 ff.

amnesty 308-309amount 319-320and termination clause 335-336and exemption clause 338, 355basis 305-307, 321ceiling 307-308, 321


penalty clause (continued)construction contract 319 ff.countertrade 325cumulation with other remedies

311-312,321,346definition 300-301evidence of prejudice 309-310grace period 304incentives 314-315indemnities payment 322-323,

336judicial penalty 338liquidated damages 301loans 318-319minimal quantity 324-325nullity or adaptation 342 ff.patent licensing 326-327performance delay 302regarding non-money obligations

340subcontractor 324supply contracts 316-317surviving obligation 616-618take or pay 324-325

plant visit 263precontractual documents 94-95precontractualliability 35-37, 137preferential right

See first refusal clauseprice adaptation clause 456, 495price adjustment clause 337professional secret 231professional standards

See industry standardsproject finance 445promise to contract 32proprietary information 233punitive damages 300

ranking clause 126 ff.reasonable 214-217reasonable care 214-217recitals 59-102

affirmations of the parties 74-75

and definitions 78-79and entire agreement clause 134and hardship 76-77, 92, 460-461attitudes of the parties 67-69circumstances 69-71contract clause regarding status

of recitals 99-100contract formation stages 73-74contract objectives 65-67English law 89expression of commitments

76-78,96-98interpretation of the contract

88-90links with other contracts 71-72,

95-96mistake and misrepresentation

91-92quality of the parties 63-65, 94

related contract 15, 54, 95-96relational contracts 212, 597representations and warranties

201, 609-610

safeguard clausesSee hardship clauses

Savoy clause 523secret 25-26, 39, 45

See also confidentiality clauseIndustrial secret, professional

secretseverability clause 167 ff.side letters

See simulationsimulation 98, 131-132sole risk clause 517stabilisation clauses 412standardisation 537-538, 566,

632-634supply contract 426, 455, 493-495,

504,521survival obligations

applicable law clause 616-617arbitration clause 616-617

claims-made clause 603confidentiality clause 606consequences for the contract

602 ff.duration 618-620dynamic view of contract law 628exclusivity 610exemption clause 617express clause and implicit oblig-

ation 612-614first refusal clause 610forum selection clause 616-617hardship clause 616-617improvements and sophistication

610non-compete clause 605, 613,

615,619obligation regarding future

contracts 604 ff.obligation to indemnify 608-610rders before termination 602penalty clause 616remedies 616representations and warranties

609-610return of documents 601return of marketing materials

601subsequent risks and insurance

603termination and inventory held

599,613validity 615

termination clauses 565 ff.applicable law 567assignment of contract 537, 566asymmetric 574

Index • 653

bilateral 574breach of contract 578condition subsequent 576consequences 588insolvency or bankruptcy

583-584lex mercatoria 567mutual consent 577notice 582nullity 574objective approach 572objective events 583partial termination 587passing of a fixed term 581performance 620-621standardisation 566symmetric 574unilateral 574

termination indemnity 336term sheet 3third party stipulation 266-268,

290-291,510third party

recitals 71-72third party determination

See arbitrationtortuous interference with contract

291

undertaking for third party 76,202-203,289-290

use of confidential information232-233

variation order 128

warranties clause 351 ff.definition 352-353

marcel fontaine, filip de ly drafting international contracts an analysis of contract clauses 2006-1

Documents

definitive contracts

contracts international

surroundingthe contract

contract wasentered

conflict oflawscontracts

legal effects of recitals

parties obligations

parties objectives